A lot of people have a sense that appeal bonds sometimes require collateral. How much collateral might be required and in what circumstances is usually a mystery, and the aim of this article is to help understand how appeal bonds are underwritten by surety companies and what is required to put them in place.
Before addressing that, it’s helpful to understand exactly what guarantee the surety company provides when issuing an appeal bond on behalf of an appellant.
How Does an Appeal Bond Work?
When a money judgment is entered against the party, which we will refer to as the judgment debtor, it becomes enforceable at some point thereafter, the timeframe of which depends on the local rules of the jurisdiction. In order for the judgment debtor to stay enforcement of the judgment during the appeal, most jurisdictions require some form of security to be posted with the court in order to protect the prevailing party (judgement creditor).
The most common form of security used is appeal bonds, which are issued by insurance companies called surety or bond companies. When they issue an appeal bond, it guarantees to the judgment creditor if the judgment is upheld on appeal and the judgment debtor does not satisfy the judgment, the surety will pay the judgment creditor.
How do surety companies underwrite appeal bonds?
Surety companies do not underwrite the merits of the case. Rather they underwrite the ability and likelihood of the judgment debtor to satisfy the judgment on their own. To gauge this, the surety will review the judgment debtor’s financial information.
Unlike insurance, surety companies underwrite and price appeal bonds under the presumption that they will not have any losses under the bonds. Therefore, the premiums that surety companies charge are very low relative to what they would have to be if they were attempting to cover losses. That being the case, the bar is very high for the judgment debtor to qualify for an appeal bond without collateral.
Let’s look at an example. If a company needed an appeal bond for $500,000 and it had $500,000 in cash, a surety company would require collateral, because there is a great amount of uncertainty whether that $500,000 in cash would be available in 2 years to pay the judgment when the appeal was concluded. If on the other hand, the same company had $10 million in cash and all other things about the company’s performance were positive, the surety would have much greater certainty that the company would be able to satisfy the judgment on their own. While there are no ratios set in stone and there are many variables considered, that hopefully gives a sense of the surety company’s considerations.
How much collateral is required?
When a judgment debtor doesn’t meet the surety’s qualifications, the surety company will require collateral to secure the appeal bond. While there are times when a surety company will accept collateral for a percentage of the appeal bond amount, generally they require collateral in the full amount of the bond. Similar to jumping out of the plane to go skydiving, you want to be 100% confident your parachute is packed correctly, because the consequences are so severe. As a result, if someone were told beforehand that there was only an 80% chance their parachute was packed correctly, they would probably choose not to jump. Surety companies approach appeal bonds the same way.
Surety companies will approve less than 100% collateral on rare occasion when the judgment debtor is very qualified but is lacking slightly in one or two small areas. In these circumstances, the surety company has a very high degree of confidence that the judgment debtor will be able to satisfy the judgment, but there is something causing a twinge of uncertainty. For example, perhaps a company is very strong and has a good track record, but the economic environment is impacting their particular marketplace, and it is hard to see how that will play out over the next couple of years during the appeal. Generally, if a surety agrees to accept partial collateral, they will charge a higher premium rate for the appeal bond to compensate for the additional risk they believe they are taking on.
Types of collateral
As touched on above, there are four types of collateral that surety companies will accept, which are outlined briefly below:
Cash Collateral – The cash is deposited either with the surety or an approved brokerage firm, and there is the opportunity for the client to earn interest on the cash during appeal. To learn more, read our article: Collateralizing an Appeal Bond with Cash
Letter 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
When a client has a judgment against them, deciding whether to appeal can feel like a monumental decision. Appellate practitioners not only help clients understand the merits of appealing their case, but there is also an opportunity to help set reasonable expectations about what will be required in order to obtain an appeal bond. At CSBA, we are always here to help clients and their attorneys navigate these unchartered waters and address any questions that naturally arise.
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