When a surety company underwrites an appeal (or supersedeas) bond, it is taking on the financial risk that a judgment will ultimately be paid should it be affirmed on appeal. To offset that risk, surety companies will often require the judgment debtor to provide collateral as security for the surety’s potential exposure.
There are currently five forms of collateral accepted by surety companies for appeal bonds, which are cash, irrevocable letters of credit (ILOCs), real estate, marketable securities, and the cash surrender value of a permanent life insurance policy. Each of these collateral options carries its own underwriting mechanics and required documentation. Given these underwriting considerations, some appellants may not be able to satisfy a surety’s collateral requirement through a single form of collateral.
When a client’s financial picture is complex, a hybrid collateral approach may be the most practical path forward. This means aggregating two or more acceptable types of collateral to meet the total bond requirement. The right collateral combination depends on each client’s circumstances and preferences. Some clients may need to preserve working capital to keep business operations running during a potentially lengthy appeal. Others may prefer not to encumber real estate that they plan to sell. And others simply want to figure out a way on how to make their assets work as an acceptable form of collateral.
When Hybrid Collateral Is the Right Approach
Below are examples of how using a hybrid approach has achieved positive results for clients.
The details have been altered slightly to respect the privacy of those involved, but the essence remains the same.
Leveraging Assets to Reduce Overall Costs
In one instance, a client needed to post a supersedeas bond and originally intended to use an Irrevocable Letter of Credit (ILOC) from their bank as collateral. To obtain the ILOC, their bank required them to borrow on their Home Equity Line of Credit (HELOC) and place the funds in a designated account. This approach would have cost the client close to $200,000 in interest over the life of the appeal.
Instead, we were able to structure a hybrid collateral arrangement that pledged the client’s real estate directly to the surety company and supplemented it with the cash surrender value of a life insurance policy. This approach helped save the client from having to pay hundreds of thousands of dollars of interest on a bank loan they did not need to take.
Lacking a Sufficient Single Acceptable Collateral
Some appellants hold the bulk of their net worth in particular types of assets like real estate or publicly traded stocks. While the market value of those assets may be in excess of the bond, sureties usually discount the value to account for market fluctuations. Real estate is typically discounted by 20% to 50% while stocks are generally discounted by 30% to 50%. That being the case, the client may have to bring in other assets to help fully collateralize the bond.
In one such situation, we had a client that wanted to use their primary residence as collateral. However, after reviewing the property and applying their discount to the estimated value, the surety was only able to offer enough credit to cover 80% of the bond. The client fortunately had some cash, and they were able to use it to provide that to the surety to supplement the remaining 20% of the collateral required. This hybrid structure allowed the real estate to serve as the primary collateral while a secondary form of collateral bridged the shortfall.
Conserving Liquidity Based on Client Needs
For many businesses or business owners, an appeal bond is rarely the only financial obligation in motion during an appeal. Legal fees, operational costs, debt service, and payroll obligations continue. Tying up a company’s entire cash reserve or credit facility in a single collateral arrangement can constrain the client’s ability to function while the appeal is ongoing.
For example, we assisted a manufacturing company looking to use cash as collateral. While they had sufficient cash to fulfill the collateral requirement, they were concerned that pledging the full amount in cash would restrict the working capital needed to source materials for a new production line. Instead, we structured a hybrid arrangement where the company pledged a portion of their marketable securities portfolio to supplement a partial cash deposit. This combination fully collateralized the bond while preserving the liquidity needed for the business to operate smoothly throughout the appeal process.
Working with an Appeal Bond Specialist
Attorneys and their clients do not need to wait for a final judgment to begin exploring appeal bond options. Reaching out to an appeal bond specialist at the first sign that an adverse judgment may be forthcoming allows time to assess the client’s full financial portfolio, identify which collateral types are eligible, and (if needed) map out a hybrid structure before any court deadline is in play. Waiting too long to start the process can eliminate some collateral options entirely.
Conclusion
An appeal bond specialist with established relationships across multiple surety markets can identify which carriers are best suited for a given client’s financial profile, which underwriters have experience with the specific collateral types being proposed, and where there is flexibility to structure an arrangement that fits the client’s financial situation and preferences. That breadth of market access and the agent’s experience with the various forms of collateral is what makes a genuinely tailored hybrid approach possible.
