When appellants don’t timely stay enforcement of a judgment, it can lead to severe consequences. In this article, we aim to educate attorneys on the most common reasons for delays in procuring an appeal bond as security for the stay by citing specific examples, because as Charlie Munger from Berkshire Hathaway once said, “A problem properly understood is 90% solved.”
The first step in the appeal bond application process is to determine whether collateral will be required by the surety company or if the client qualifies for the bond simply by indemnifying the surety company against loss.
Uncollateralized Appeal Bonds
To determine whether a client qualifies for an appeal bond without collateral, a surety will review the client’s financial statements. There are times when attorneys or clients make assumptions about what surety companies base their decisions on leading to overconfidence that the client will qualify for the bond without any issue. This can in turn cause the client to delay starting the application process. This most often occurs with publicly traded companies or insurers believing that by their nature they automatically qualify. While this is often the case, there are exceptions.
Many years ago, we worked with an insurer that needed a $30 million appeal bond. The company’s surplus (or net worth) was about $90 million. The company had lost money over the past couple years, and the judgment represented a third of its surplus. The combination of these factors caused the surety companies to require collateral, which the insurer was not prepared for and delayed the process.
In another example, we worked with a publicly traded company that had several hundred million dollars of cash from a recent debt raise, and they needed an appeal bond in the range of $20 million. On the surface it seemed pretty straightforward that they should be able to qualify for the bond just based on their indemnity to the surety company. However, taking a closer look, the client was projecting to burn through their cash by the time the appeal was over. Furthermore, the rating agencies downgraded the company based on these projections causing its debt to be expensive and lowering the prospects of its ability to get new capital. Ultimately, the client was required to post collateral.
Cash Collateral
Using cash is generally one of the quickest forms of collateral, but there are still opportunities for delays. There are various ways to post cash with a surety company, but the most common way today is using special programs where the client can place the cash with a preapproved brokerage firm and invest in things like US Treasuries to earn a higher rate of interest.
Use of these programs involves the client setting up an account with the preapproved brokerage firm. We generally recommend that the client sets up the account even if they are unsure whether or when they are going to move forward with the bond. Setting up the account doesn’t require it to be funded immediately, or at all, if circumstances change.
We have many clients that are proactive in all respects except for taking this step of establishing the account. One client in particular waited months while the final judgment amount was being determined and then started to establish the account with only a couple days before the judgment was entered. These accounts can take anywhere from 5-10 days to establish, and some particular factors with the client’s business was causing the set-up process to take 10 days. The other party of course was threatening to be very aggressive in their collection efforts. Fortunately, we were able to work with the brokerage firm and surety to expedite the process in order to get the bond filed in time.
Letters of Credit
The most common delay when it comes to a client using a letter of credit is underestimating the time it will take their bank to approve and issue the letter of credit. Banks underwrite letters of credit like they would any other loan, which often means the client’s bank will need the necessary application and financial information to bring to a loan committee that only meets periodically. In our experience, clients with very established banking relationships can get a letter of credit within a couple weeks. All other circumstances will generally take longer.
Another factor causing delays in today’s banking environment is sureties are more selective in the banks they will accept letters of credit from. We are usually able to find a surety that will accept a particular bank, but that can sometimes take a few days.
Even after the surety approves a bank, there is the potential for negotiation of the language in the letter of credit format between the bank and surety. While this doesn’t happen often, it’s important to build in time in the process in case this does arise.
Real Estate
Real estate is rife with potential delays because there are so many moving parts. Sureties will typically require an appraisal of the property, and here delays can occur simply because of appraisers being unavailable to complete the appraisal in the timeframe the client envisions. Residential appraisals usually take about 7 days, but commercial appraisals can take around 3 weeks.
Another area where there can be surprises is in the title. We commonly come across unexpected liens for unpaid taxes, prior judgments, or prior loans that have not been reconveyed.
Many commercial loans can require approval from the first lender to place a second lien. The process to get that approval from the first lender can take time and may not be granted at all, which can throw a big wrench into the client’s plans for collateralizing the bond.
Marketable Securities
Some sureties will accept a pledge of stocks and bonds held in a non-retirement brokerage account. The mechanics of doing so involve the surety entering into a pledge or account control agreement with the brokerage firm. While the sureties have their own standard agreements, the brokerage firms typically want to use their own. Because these forms aren’t used often by the brokerage firms, it can take the advisors time just to track them down for the surety’s review.
Once the surety has the brokerage firm’s form, the surety will have to determine if it is acceptable. While we generally know which brokerage firms have acceptable agreements based on past experience, the forms are periodically updated and the surety’s willingness to accept it can change.
In one instance where the brokerage firm and surety couldn’t reach an agreement on the form, we were able to connect the client with another brokerage firm with an acceptable form to transfer their account. There was no costs or tax consequences, and fortunately in this case, the client started the bond application process with plenty of time to deal with these unforeseen bumps in the road.
Conclusion
The best situations we encounter is where there is a mutual understanding of the appeal bond process between us and the attorneys we work with. For our part, we must understand the deadlines and factors that can alter those deadlines such as post-trial motions. For the attorneys we work with, it is understanding some of the nuances with potential delays outlined here. Together, we can communicate to the client to help them understand the road ahead and the options for getting the bond in place with the desired structure and in the timeframe required.
