Appellants today are experiencing a double whammy of sorts. Whammy number one is they are being hit with larger and larger judgments than in the past. According to a study published in 2022 by the U.S. Chamber of Commerce Institute for Legal Reform, “The median reported nuclear verdict increased from $19.3 million in 2010 to $24.6 million in 2019. This represents a 27.5% cumulative increase in the median nuclear verdict over a 10-year period which inflation rose by 17.2%.” The median nuclear verdict has likely increased even further over the past 6 years since the most recent study was published.
The second whammy comes from higher interest rates. Many jurisdictions require the appeal bond to cover interest and costs during the appeal. During 2009 to 2019, appellants benefited from historically low interest rates.
Using the federal rate as required in many federal district courts as a proxy and assuming it takes two years for an appeal to conclude, appellants in certain jurisdictions are having to obtain appeal bonds for roughly 4% to 8% more than they were in the prior decade.
State Appeal Bond Caps
Many states have placed limits on the amount of the appeal bond required by an appellant. Some states like in Texas, Georgia, Hawaii, and Virginia simply cap the dollar amount required, and each of these states have currently set the maximum bond amount at $25 million. Based on our research, those states that have caps typically range between $25 million to $150 million.
Several states have carveouts for small businesses such as the $1 million bond limit in Nevada or limitations or exemptions for Master Settlement Agreements. Texas also has a unique rule limiting the appeal bond to 50% of the appellant’s net worth.
Due to the higher verdicts and interest rates, we are seeing more bonds hit these caps than we did in the past, which is helping to limit the size bond that some appellants would otherwise be required to obtain.
Impact of Larger Bond Requirements
Caps on appeal bonds only help in those states that have them and only for judgments that actually hit the cap. As a result, it can be harder for some appellants to qualify for the larger appeal bonds both with and without collateral. Let’s take a look at both situations.
Uncollateralized Bonds
When a surety company considers providing a bond on an uncollateralized basis, they review the financial strength of the appellant relative to the bond size required. Therefore, if someone needs a $10 million appeal bond instead of $5 million, the requirements are going to be greater for the higher amount.
While there are no set ratios, because a variety of factors are considered, the surety is generally looking for the appellant to have cash, liquid resources, and credit lines of 10 to 20 times that of the bond required to demonstrate that they will be able to easily satisfy the judgment on their own in 2 to 3 years when the appeal is finally concluded.
Larger bonds obviously make this more difficult, and this is particularly true for smaller to mid-sized businesses. As a result, we are seeing some appellants who may have qualified for uncollateralized bonds in the past be required to put up collateral.
Collateralized Bonds
If a surety company cannot qualify the appellant for the bond based on their financial strength, then the surety will require collateral. The collateral typically has to be in the full amount of the bond. While there are some limited exceptions, roughly 95% of bonds are either written without any collateral or collateral in the full amount of the bond. Larger judgments and ultimately, larger appeal bond requirements have made it more difficult for some appellants to have enough collateral available to fully secure the bond.
Alternative Solutions
We have seen a few courts allow for smaller bond amounts even when there is not a statutory cap in place. There have also been instances where the parties have been able to stipulate to a lower bond amount than the rules require. Often the judgment creditor is incentivized to take something rather than nothing.
In both instances, the judgment debtor typically has to demonstrate their inability to obtain the bond for the full amount, and we are often asked to provide affidavits in these situations confirming this to be the case.
Conclusion
The dual pressures of rising verdict sizes and higher interest rates are reshaping the appeal bond landscape. While state-imposed caps and alternative solutions offer some relief, they are far from universal. Appellants must proactively plan for the financial demands of an appeal, including early evaluation before a judgment is entered and discussion of the potential collateral requirements. Defense and appellate council are on the front lines of this and in the best position to advise their clients to take these steps early.
