The evolution of home equity theft: from Rafaeli to Pung
On February 25, the U.S. Supreme Court will hear oral arguments in Pung v. Isabella County, the latest legal challenge to the practice of home equity theft to reach the high court.
Pacific Legal Foundation’s fight to end home equity theft began in 2015 and has already included a victory at the U.S. Supreme Court. But the Pung case presents a question that the Court has not yet answered, opening a new path to vindicating homeowners’ rights.
What is home equity theft?
Home equity theft occurs when local governments or private lienholders seize a property for tax debt, sell it, and retain all proceeds, including the homeowner’s equity, which often far exceeds the actual tax debt owed. Although both the Constitution and Supreme Court precedent prohibit the government from taking more than it is owed in unpaid taxes, many local governments use opaque, convoluted processes to turn a hefty profit.
Rafaeli: The first victory
In 2014, Oakland County seized Uri Rafaeli’s house over a rounding error. When Uri miscalculated the interest on his property taxes and underpaid by a mere $8.41, the County foreclosed the property, sold it for more than $24,000, and pocketed the entire sum.
Uri partnered with Pacific Legal Foundation to challenge the theft, and in 2020, the Michigan Supreme Court ruled unanimously in his favor. The court held that it is unconstitutional for the government to take more than it is owed.
Michigan’s reply
In December 2020, the Michigan Legislature responded with a strict new claims process for former owners who aim to recover their surplus equity. Under the revised law, homeowners must exactly adhere to the following constraints—and any mistake in the form or timing can void their claim entirely:
- Submit a notarized claim form by July 1—before tax auctions even occur between August and October.
- Deliver the form in person or by certified mail with return-receipt requested. No other delivery method, including even priority mail, will be accepted.
- File an additional, duplicative court motion to pursue the surplus, if the government accepts your notarized claim form.
- Appear in court.
- Secure a favorable judgment confirming your right to the equity.
- Pay the government a 5% “sales commission” out of the surplus proceeds sought by the owner.
Unsurprisingly, few homeowners are able to successfully navigate the labyrinthine process. Between Uri’s victory in 2020 and the next major ruling in 2023, the State of Michigan foreclosed about 19,000 properties and seized over $125 million in surplus equity. Homeowners were only able to recover $26 million.
Tyler: The Supreme Court ruling
In 2023, protections for homeowners’ rights were nationally recognized in Tyler v. Hennepin County when the U.S. Supreme Court unanimously ruled in favor of Geraldine Tyler. The 94-year-old filed a lawsuit after the government seized her Minneapolis condo and kept the entire sale proceeds—over $25,000 more than she owed in taxes.
The Supreme Court’s ruling found that home equity theft violates the Takings Clause of the Constitution. Chief Justice Roberts summarized, “The taxpayer must render unto Caesar what is Caesar’s, but no more.”
Shadow equity theft continues in Michigan
Following the Tyler decision, 19 states enacted reforms to protect homeowners from this abusive practice. But despite the Supreme Court’s ruling, five states—including Michigan—continue to engage in home equity theft through subtler practices. A recent research report details how these states confiscate homeowners’ equity, and how few homeowners successfully challenge the process to reclaim what the government has stolen.
Pung: A new question for the Court
When the government forecloses your property to collect a tax debt, it owes you just compensation for the value of the property exceeding that debt. But who decides the value of the property? That question is before the Court in Pung v. Isabella County.
The Pungs’ family home (owned by the Estate of Timothy Scott Pung) was seized and sold after a local government official retroactively denied a tax exemption and claimed that the family owed a supplemental $1,600 property tax. Because Pung disputed the denial, he didn’t pay the supplemental tax while state court litigation was ongoing. Isabella County foreclosed on and sold the home in a fire-sale auction for $76,000 and kept the entire sum.
The family sued in federal court. The court, applying Rafaeli, ordered the County to return the surplus proceeds to satisfy the Constitution’s Takings Clause.
But the Pungs argue that the County owes more than just the $74,000 it already took by selling their home at the depressed auction price. It also owes them the difference between their disputed tax debt and the property’s actual value, which the county itself conceded is about $194,000. The Pungs also argue that the County’s retention and wasting of the equity constitutes a fine that is grossly disproportionate to the family’s alleged offense—not paying what they were wrongly charged—and that this constitutes an excessive fine under the Eighth Amendment.
The Pungs’ lawsuit asks the U.S. Supreme Court to hold Isabella County accountable for destroying $118,000 in equity to deter nonpayment of, or punish a protest over, a tax bill that was never owed.
If the Court rules in the Pungs’ favor, the victory will improve the remedy for victims of home equity theft. The ruling would empower former homeowners to claim just compensation from local governments, potentially reducing the number of homeowners bearing the burden of sacrificial auctions over small debts.
The Supreme Court will hear oral arguments on February 25.
