[author: Dan Huckabay]*

For civil defense attorneys, “bond” is a four-letter word in more ways than one when it comes to appeals, because appeal bonds only come into play when something didn’t go right at the trial level. That being said, when the court gets something wrong and an appeal is necessary, it’s extremely important to stay enforcement of the erroneous judgment to protect the client’s assets during the appeal.

In order to stay enforcement of a judgment during appeal, most state and federal courts require security to be posted with the court to protect the other party and maintain the status quo. The timeframe for posting the security after the judgment is entered is relatively short and varies depending on the jurisdiction. In some jurisdictions judgments are immediately enforceable while others have an automatic stay for a certain period such as 30 days at the federal level. Post trial motions, local rules, and other case specific circumstances can influence this timeframe. The question then becomes, how can civil litigators help their clients stay enforcement of the judgment while the client pursues their appeal.

Some defense attorneys are tempted to leave this as a concern for the appellate counsel to worry about, but it misses several important opportunities, not the least of which is to be of service to the client in an otherwise undesirable situation. In addition, given the relatively short timeframes between when a judgment is entered and when it is enforceable, the trial counsel is in the best position to advise the client early on of the requirements for posting security with the court to stay enforcement.

Now that you are hopefully convinced of the value you can provide to your clients, let’s get into the important basics about appeal bonds for you to know.

What Is an Appeal Bond?

The most common form of security used in most state and federal courts is an appeal bond, which are issued by insurance companies often referred to as bond or surety companies. By issuing the bond, the surety is guaranteeing to pay the judgment plus applicable costs and interest as required by statute up to the bond amount to the judgment creditor if the judgment is not satisfied by the appellant (judgment debtor).

How Are Appeal Bonds Underwritten?

To understand how appeal bonds are underwritten by surety companies, it’s important to understand the fundamental differences between surety and insurance. The goal of insurance is to transfer risk from the insured to the insurer for a premium. The premiums charged are expected to cover an actuarily estimated amount of losses, hopefully leaving the insurer with a profit. With bonds on the other hand, the surety company is issuing a guarantee to a third party on behalf of their client referred to as the principal. The principal pays the premium, but unlike insurance, surety is underwritten and priced with very low premium rates under the theory that there will be no losses. As part of the arrangement, the principal is required to indemnify the surety against any loss they incur under the bond. Based on this dynamic, surety bonds are much more like bank loans than insurance.

Given the obligation the surety is undertaking when issuing an appeal bond and the fact that the majority of appeals are not successful, surety companies have to be very conservative in the terms in which they provide appeal bonds. They will provide bonds on an unsecured basis to appellants that are very financially strong relative to the bond amount, and where the surety feels certain the appellant will be able to satisfy the judgment on their own without the surety’s involvement. In all other situations, sureties will require collateral typically for the full amount of the bond.

Four Types of Collateral Surety Companies Will Accept

There are four types of collateral that surety companies will accept, which are outlined briefly below. It’s important to note that these forms of collateral can be used in combination with one another:

Cash Collateral

Cash is one of the quickest and least expensive forms of collateral that appellants can use. Some sureties will pay interest on the cash deposit, and there are programs where the client can invest in assets like one-year US treasuries that are currently earning around 5%.

Surety companies will not accept cash from a client if they have concerns about the client filing bankruptcy, because there have been situations where surety companies are forced by bankruptcy courts to hand over collateral under bankruptcy preference laws. For this reason, sureties will sometimes require the client to provide financial information when considering whether to accept cash collateral.

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 by surety companies as being similar to cash because of their liquid nature. The process for clients to obtain a letter of credit can be similar to applying for a loan unless the client already has a letter of credit facility in place for their business. Sometimes banks will want to secure the letter of credit with cash in which case it can often be more advantageous to the client to post the cash directly with the surety to avoid paying the fee charged by the bank for the letter of credit.

Surety companies have to approve the bank being used, because the sureties risk when accepting a letter of credit is that the bank will not be solvent to honor the obligation. This was the case when Silicon Valley Bank, First Republic Bank, and Signature Bank all failed in 2023, and several surety companies were stuck with worthless letters of credit.

Each surety company has their own letter of credit format that they require the bank to use, and it’s important to provide that to the bank early on.

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. Sureties will consider both residential and commercial real estate. There are times when surety companies will accept raw land in very well-developed areas, but it is generally much more difficult to get approved.

There are only two surety companies that regularly accept real estate as collateral for appeal bonds, and the process is very similar to obtaining a mortgage. The sureties generally require an appraisal of the property to verify the value, they obtain preliminary title reports to confirm what liens or encumbrances, if any, are on the property, and they require a title policy before the deeds of trust are filed. Generally, it takes 30-60 days to get a bond in place when using real estate as collateral.

It’s important to note that surety companies discount the appraised value of the property to account for market fluctuations. Therefore, if a residential property has an appraised value of $1 million and no mortgage against it, a surety may only give credit of $700K.

Marketable Securities

These are non-retirement brokerage accounts consisting of publicly traded stocks and bonds. The client can pledge the account to the surety, but it is important to note that the surety has to approve the assets held in the account and the brokerage firm’s pledge or account control agreement.

Similar to real estate, surety companies don’t give credit to the stated value of the assets in order to account for market fluctuations. The amount of the discount that they will apply to the value depends on the type of assets held in the account. For example, short-term US treasuries may not be discounted at all, whereas individual stocks or mutual funds will be.

Timeframe for Getting an Appeal Bond

The timeframe for getting a bond in place largely depends on whether collateral is required. If the appellant qualifies for the bond without collateral, the appeal bond can usually be issued within a couple weeks at the most. For large publicly traded companies or insurers, they can sometimes be issued in 24-48 hours.

When collateral is required, the timeframe will depend on the type of collateral being used and can range from a few days with cash to 60 days with real estate.

It is important for attorneys to familiarize themselves with the local rules in the jurisdiction that the judgment is in to determine whether there is an automatic stay of enforcement. Ideally, clients contact a surety agent early, perhaps even before a judgment is entered, to assess their situation and provide guidance to the options and timeframes for getting the bond in place.

Conclusion

It’s imperative to use a surety agent that is an expert in appeal bonds. Surety is similar to the law – there is a lot of technical expertise and specialization in certain areas. Appeal bonds are one of those areas. Agents need to know the requirements in each jurisdiction, what forms to use, have access to the right surety companies, and know how to get a bond and/or collateral released. With so much at stake for the client, it’s incredibly important that they get the right advice to avoid making an already bad situation worse.

* Court Surety Bond Agency