In the spirit of the Zen proverb that says, “It takes a wise person to learn from their mistakes, but an even wiser person to learn from others.”, we decided to write an article highlighting some of the most common mistakes we see people make in the appeal bond process.
Waiting too long to start
By and large, attorneys do an excellent job of advising their clients about the need to stay enforcement of the judgment pending appeal. However, there are times when it may slip through the cracks or clients simply don’t heed the warnings of their counsel to start the process of obtaining an appeal bond.
In one recent situation, a client didn’t come to us until after their company bank account was garnished for over $1 million. The client didn’t have enough other assets to collateralize the appeal bond, and thus, they could not get their $1 million back from the judgment creditor.
In other situations, the consequences aren’t quite as severe, and it simply limits the options the client has for obtaining a bond. This most commonly occurs with clients that want to use real estate as collateral, because real estate can take 30-60 days to get in place. Particularly in jurisdictions where there is no automatic stay, it is imperative to start the process as early as possible when real estate is involved. Therefore, attorneys can provide great value to their clients to encourage them to start discussions with an appeal bond broker once an adverse outcome is suspected or known.
Making assumptions
There are three main assumptions we regularly encounter that people unfortunately make when applying for appeal bonds.
It’s better to post cash directly with the court
It is common for attorneys to wonder why it would make sense for a client to post cash as collateral with a surety company and pay a bond premium when the client can potentially put the cash directly with the court and not incur the premium cost. What many don’t realize is some sureties pay interest on cash deposits, and in today’s interest rate environment, the interest earned is well in excess of the premiums paid, leaving the client in a more favorable position than if the cash were posted directly with the court.
My client will qualify without collateral
When the client is an insurer, bank or publicly traded company, there is sometimes a belief that they will automatically qualify for an appeal bond without collateral. While this is often true, there are exceptions.
We recently had an attorney refer us to their insurer client, and they needed a bond in the $2 million range. Upon examining the insurer’s financial statements, they had lost money for the last several years and their capital surplus had diminished to the point where the rating agency, A.M. Best, downgraded them. We explained this to the attorney and the client, but unfortunately, they had difficulty understanding why those factors prevented a surety from approving the bond without collateral, and they embarked on a search to find a different surety. Several weeks later they returned to us having not been able to get a different answer, and in this particular situation, the bond amount was required to include post judgment interest resulting in the bond increasing by several hundred thousand dollars as a result of their delay.
The most important factor is getting the lowest premium rate
Often times, the first question we are asked by new clients is how much the appeal bond will cost. While getting a reasonable premium rate is always important, what is generally most important is getting the bond in place on time to stop enforcement actions under the judgment and structure the terms in a way that is suitable to the client. When collateral is being used, this takes understanding the client’s financial circumstances, what assets they have available to use as collateral, and based on what they prefer, ensuring that the bond can be put in place within the necessary timeframe.
Every form of collateral has a different timeframe associated with putting it in place. As mentioned earlier, real estate can take 30 to 60 days, a letter of credit from a bank can take a few weeks depending on the client’s banking relationship, and pledging a non-retirement brokerage account can take anywhere from 10-14 days depending on who the brokerage firm is and the type of assets being held in the account. It is worth noting that when using cash collateral, a bond can be put in place in as little as a few days, and when there isn’t enough time to get another form of collateral in place, we sometimes arrange for cash to be used upfront to collateralize the bond with the intention to substitute another form of collateral later on.
Not involving their attorney
There is a lot of collaboration that occurs between the surety agent and attorney. While many attorneys prefer us to have direct contact with the client, we find that the most successful situations involve us working alongside the attorney. The attorney plays a critical role in calculating the bond amount, confirming when the bond needs to be filed by, and reviewing the bond form.
Many cases have post-trial motions, which may or may not cause the deadline to change for the bond to be filed. Only the attorney is in a position to advise on that, and we rely heavily on updates about timing, because it plays an important factor in the type of collateral being used and how quickly the client needs to work through the process.
Using more than one surety agent
We would be remiss if we didn’t mention one final mistake. To some, it can seem advantageous to use multiple surety agents when obtaining an appeal bond. The thought, as it goes, is to cover more ground and create competition. The reality is it can slow down the process, because agents will sometimes go to the same surety companies, and if sureties receive submissions from multiple agents, they sometimes lose interest out of fear of being bid out like a commodity.
Our recommendation to prospective clients is to interview multiple agents and choose the one that they have the most confidence to represent them. In vetting surety agents, clients should ask things like how many appeal bonds the agent writes a year, the size bonds they’ve written, types of collateral accepted, and generally just gauge the agent’s overall expertise.
