For civil defense attorneys, “bond” is a four-letter word in more ways than one when it comes to appeals, because appeal bonds only come into play when something didn’t go right at the trial level. That being said, when the court gets something wrong and an appeal is necessary, it’s extremely important to stay enforcement of the erroneous judgment to protect the client’s assets during the appeal.
In order to stay enforcement of a judgment during appeal, most state and federal courts require security to be posted with the court to protect the other party and maintain the status quo. The timeframe for posting the security after the judgment is entered is relatively short and varies depending on the jurisdiction. In some jurisdictions judgments are immediately enforceable while others have an automatic stay for a certain period such as 30 days at the federal level. Post trial motions, local rules, and other case specific circumstances can influence this timeframe. The question then becomes, how can civil litigators help their clients stay enforcement of the judgment while the client pursues their appeal?
Some defense attorneys are tempted to leave this as a concern for appellate counsel to worry about, but it misses several important opportunities, not the least of which is to be of service to the client in an otherwise undesirable situation. In addition, given the relatively short timeframes between when a judgment is entered and when it is enforceable, the civil litigator is in the best position to advise the client early on of the requirements for posting security with the court to stay enforcement.
Now that you are hopefully convinced of the value you can provide to your clients, let’s get into the important basics about appeal bonds for you to know.
What is an Appeal Bond?
The most common form of security used in most state and federal courts is an appeal bond, which are issued by insurance companies often referred to as bond or surety companies. By issuing the bond, the surety is guaranteeing to pay the judgment plus applicable costs and interest specified up to the bond amount to the judgment creditor if the judgment is not satisfied by the appellant (judgment debtor).
How are Appeal Bonds Underwritten?
To understand how appeal bonds are underwritten by surety companies, it’s important to understand the fundamental differences between surety and insurance. The goal of insurance is to transfer risk from the insured to the insurer for a premium. The premiums charged are expected to cover an actuarily estimated amount of losses, hopefully leaving the insurer with a profit. With bonds on the other hand, the surety company is issuing a guarantee to a third party on behalf of their client referred to as the principal. The principal pays the premium, but unlike insurance, surety is underwritten and priced with very low premium rates under the theory that there will be no losses. As part of the arrangement, the principal is required to indemnify the surety against any loss they incur under the bond. Based on this dynamic, surety bonds are much more like bank loans than insurance.
Given the obligation the surety is undertaking when issuing an appeal bond and the fact that the majority of appeals are not successful, surety companies have to be very conservative in the terms in which they provide appeal bonds. They will provide bonds on an unsecured basis to appellants that are very financially strong relative to the bond amount, and where the surety feels certain the appellant will be able to satisfy the judgment on their own without the surety’s involvement. In all other situations, sureties will require collateral typically for the full amount of the bond.
4 Types of Collateral Surety Companies will Accept
There are four types of collateral that surety companies will accept, which are outlined briefly below. It’s important to note that these forms of collateral can be used in combination with one another:
Cash Collateral
Cash is one of the quickest and least expensive forms of collateral that appellants can use. Sureties will often pay interest on the cash deposit, and there are programs where the client can invest in assets like one year US Treasuries that are currently earning over 4%. To learn more, read our article: Collateralizing an Appeal Bond with Cash.
Letters of Credit
Letters of credit are provided by banks, and they are essentially a promise to pay on demand to the surety company. They are viewed similar to cash by surety companies because of their liquid nature. To learn more, read our article: How Letters of Credit Work to Secure Appeal Bonds.
Real Estate
Real estate can be a very important option for many judgment debtors that have a significant portion of their assets invested in real estate and don’t have the liquidity to put cash with a surety. To learn more, read our article: Using Real Estate to Secure Appeal Bonds.
Marketable Securities
These are non-retirement brokerage accounts consisting of stocks and bonds. To learn more, read our article: Securing an Appeal Bond with a Stock and Bond Portfolio.
Timeframe for Getting an Appeal Bond
The timeframe for getting a bond in place largely depends on whether collateral is required. If the appellant qualifies for the bond without collateral, the appeal bond can usually be issued within a couple weeks at the most. For large publicly traded companies or insurers, they can sometimes be issued in 24-48 hours.
When collateral is required, the timeframe will depend on the type of collateral being used. For more information on these timeframes, read our article Protecting Your Client’s Assets on Appeal
Conclusion
It’s imperative to use a surety agent that is an expert in appeal bonds. Surety is similar to the law – there is a lot of technical expertise and specialization in certain areas. Appeal bonds are one of those areas. Agents need to know the requirements in each jurisdiction, what forms to use, have access to the right surety companies, and know how to get a bond and/or collateral released. With so much at stake for the client, it’s incredibly important that they get the right advice to avoid making an already bad situation worse.
