Navigating the post-judgment phase and securing an appeal bond to meet strict court deadlines can be a complex process for attorneys and their clients. The bonding process alone can be difficult to navigate since the need for appeal bonds don’t come up often.To provide some clarity and help attorneys better manage client expectations when it comes to the appeal bond process, here are six common misconceptions about appeal bonds and the reality behind them.
Misconception 1
Misconception: Surety companies evaluate the merits of the case in their underwriting.
The Reality: Surety companies do not underwrite based on who they think will win the appeal.
A surety underwriter’s focus is purely financial: does the judgment debtor have the financial strength and liquidity to qualify for the bond without collateral? They will look at the client’s profitability, cash flow, and determine with some level of certainty whether they think the client will be able to easily satisfy the judgment in a worst case scenario should the judgment be affirmed. If it’s determined that collateral will be required, the underwriter’s focus then shifts to evaluating the proposed collateral.
While the merits of a case don’t factor into a surety’s underwriting, public relations occasionally do. Some sureties might shy away from cases that generate high media coverage. In these types of cases, a professional surety agent should have access to multiple surety companies to ensure that they are able to find the right market for your client.
Misconception 2
Misconception: It is best for clients to work with multiple agents to get the best terms possible.
The Reality: Having multiple agents “shop” the appeal bond around simultaneously will usually slow down the process and may yield more unfavorable terms.
Because attorneys face tight court deadlines, efficiency is critical when it comes to obtaining an appeal bond. When surety underwriters receive the same submission from multiple agents, they may assume it is a bidding war and are less likely to put their strongest offer forward.
A client should treat securing an appeal bond similar to hiring any other service professional such as an attorney, accountant or wealth adviser. Find the most qualified expert to fit their needs by doing research, getting referrals, and ultimately, interviewing several to narrow it down to the agent the client is most confident can serve their needs. Some important questions to ask agents upfront are whether they specialize in appeal bonds, how many appeal bonds they issue per year, how many surety companies they have access to, and what the largest appeal bond they have handled is. Once you and the client find the right expert, let them work exclusively on your behalf to secure the best terms possible for your client.
Misconception 3
Misconception: If a client is a large entity, they will qualify for the bond without collateral.
The Reality: Corporate size and status do not automatically result in an uncollateralized bond approval.
While publicly traded companies, banks, and insurers are the most likely candidates to qualify without collateral, the underwriting will still come down to their specific financial wherewithal relative to the size of the bond. As previously mentioned, surety companies are primarily looking to determine the client’s liquidity, profitability, and cash flow. Because appeals can potentially take years, underwriters will forecast two to three years into the future to ensure the judgment debtor will still easily be able to pay the judgment if it is affirmed.
Consider a large, publicly traded company. We initially secured a multi-million dollar appeal bond for them with no collateral based purely on their corporate strength and indemnity. Fast forward two years, and the company was losing money while its stock had dropped significantly. The surety company became concerned about their future cash flow and considered requiring collateral be posted with them. We were able to ease the surety company’s concerns as the case was coming to a close, and the client was successful, so no collateral ended up being required. However, should that company need the same size appeal bond at this time, collateral will more than likely be required as a condition of approval.
Misconception 4
Misconception: It is better for a client to post cash directly with the court.
The Reality: For larger judgments, posting cash directly to the court is often a missed financial opportunity.
While posting cash directly with the court can save the client the cost of the bond premium, courts will generally pay little to no interest on the funds they hold. If a client posts that same cash as collateral with a surety company instead, they can often earn interest on those funds. In many larger cases, the interest earned offsets the cost of the bond premium entirely and can even yield an additional return for the client.
Attorneys should advise their clients to consult with an appeal bond specialist to explore these interest-earning options before defaulting to post cash with the court. On smaller judgments, it may end up being best in terms of costs for the client to post the cash with the court, but at least having them explore all options first will ensure that they make the right financial decision.
Misconception 5
Misconception: Clients with a high net worth can easily put up collateral.
The Reality: A high net worth does not guarantee that a client will have acceptable assets to be used as collateral.
Surety companies view appeal bonds as high risk given they are a financial guarantee that obligates the surety to satisfy the judgment on behalf of the judgment debtor and there is a high likelihood of a claim since most appeals aren’t successful.
Due to this payout risk, many surety companies will only accept liquid assets as collateral such as cash or bank letters of credit that can be accessed quickly without any market risk of fluctuations in value. Many high-net-worth individuals and entities have their wealth in assets like publicly traded stocks and bonds, real estate, equipment, or as a shareholder of privately held businesses. Surety companies will generally not consider equipment or private businesses as collateral, and there are only two sureties in the marketplace that currently accept real estate or a pledge of publicly traded stocks and bonds held in a non-retirement account.
Misconception 6
Misconception: Appeal bonds can be put in place in just a few days.
The Reality: A fast turnaround is everyone’s priority, but the timeline is generally dictated on whether the client qualifies for the bond without collateral, or if collateral is required, the type of collateral the client will be providing.
If a client is a large publicly traded company that qualifies without collateral, or if the bond is collateralized with a straightforward asset like cash, underwriters can often approve and the agent can issue the bond in a matter of days.
If the client is using an irrevocable letter of credit as collateral, underwriters can provide a preliminary approval very quickly, but then it typically takes banks time to underwrite the original letter of credit, which can range anywhere from a few days to a few weeks.
If the principal is relying on real estate, the process requires more complex underwriting, appraisals, and title searches, which take time. This process will typically take anywhere between three to five weeks.
Conclusion
Understanding how appeal bonds actually work allows attorneys to guide their clients with greater confidence and avoid costly missteps during a critical phase of litigation. By dispelling these common misconceptions, counsel can help their clients better anticipate underwriting requirements, and position them for the most favorable outcome. Engaging an experienced appeal bond specialist early is not just helpful, it can be a decisive advantage in meeting deadlines and optimizing results.
