While cash is one of the most well-known forms of collateral that can be used to secure appeal bonds, it is also one of the least understood in terms of its benefits. Part of the confusion comes, because some courts will actually accept cash directly in lieu of an appeal bond, which makes people wonder why they would purchase an appeal bond and pay a premium rather than just put cash with the court directly. This article will address this question directly as well as outline the process for securing an appeal bond with cash and highlight the benefits of using a surety company.
Is 100% Collateral Always Required?
With most appeal bonds, sureties will either approve them on an unsecured basis without collateral or fully secured with collateral of 100% of the bond amount. To learn more about the situations when sureties will consider unsecured appeal bonds, read our article: Qualifying for an Appeal Bond Without Collateral
That being said, there are cases where a surety company will approve a bond with less than 100% collateral. Those are typically for applicants that are very financially strong, but don’t quite meet the surety’s underwriting requirements to waive collateral completely. In these situations, it’s almost always advantageous to put partial cash with a surety company, because the court will always require the full amount.
The Process for Using Cash Collateral
The process for using cash as collateral is very simple and quick. The applicant simply wire transfers the cash to the surety to be held in their trust account. Wire transfers can be done as quickly as the same day but sometimes take up to 24 hours depending on the applicant’s bank’s cutoff time to send wires out.
It’s important to note that the surety company will require the indemnity of the party providing the cash in addition to the principals listed on the bond. For example, if the appellant is a corporation, and the sole stockholder decides to put up the cash from a personal account, that stockholder will also need to indemnify the surety in addition to the corporation.
Advantages to Using Cash
Perhaps the least understood element to using cash as collateral is that some sureties pay interest on the cash deposit. At CSBA, we also have our Invest Plus program with select sureties that enables applicants to invest their cash in things like U.S. Treasury Bonds, Municipal Bonds, and Investment Grade Corporate Bonds. These investments are managed by third party investment brokerages and any investments are subject to the surety’s approval. It’s important to note that the investment risks and returns are solely a matter between the applicant and brokerage firm investment advisors.
The interest earned with sureties can be significant enough in some cases to exceed the bond premium. Many courts do not pay interest, and if they do, it is generally at a much lower rate than what can be obtained through surety programs.
Another major advantage of using cash is it can be used as a bridge to obtain an appeal bond while another form of collateral is being put together. Obtaining a letter of credit or putting real estate in place can take several weeks, and using cash initially to collateralize a bond can buy the necessary time to go through the process with the other forms of collateral.
Bankruptcy Preference Laws
Some surety companies require financial statements from the party providing the cash collateral due to bankruptcy preference laws. Those laws subject the surety to the possibility of the Bankruptcy Court requiring the surety to hand over collateral as part of the bankruptcy proceedings. Reviewing the financial statements gives the surety company an opportunity to determine the likelihood of bankruptcy in the near term.
Just like it is important to determine the financial strength of a bank where cash deposits are placed, it is also important to know the financial strength of a surety company. With insurers, there is a rating agency named A.M. Best Rating that annually grades surety companies. At CSBA, we only use “A” rated surety companies, and we work with some of the strongest insurers in the world.
Before drawing the conclusion that it doesn’t make sense to use cash to secure an appeal bond, we encourage you to talk with an appeal bond specialist about the various options outlined above. Dismissing this viable option can potentially cost tens or hundreds of thousands of dollars in interest earned on the cash deposit.
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