August 2019
When a party receives an adverse money judgment and there are grounds for appeal, one of the first major considerations is how to stay enforcement of the judgment. It is such a significant issue that for some that their ability, or perhaps inability, to stay enforcement will determine whether they pursue their appeal.
You are viewing: What Is An Appeal Bond
Appeal bonds provided by surety insurance companies are the most common form of security used in almost all state and federal courts, yet how they are underwritten and the terms under which they are provided are unclear to many appellate practitioners. This article will attempt to arm appellate practitioners with the fundamentals of appeal bonds, so that they can help their clients protect their assets and ultimately pursue their right to appeal.
What exactly are appeal bonds?
Before getting into the details of how to obtain an appeal bond, it helps to understand what exactly they are and the guarantee they provide. Put simply, the purpose of an appeal bond is to maintain the status quo during appeal whereby the surety insurer issues a guarantee on behalf of the appellant to the appellee that if the judgment is affirmed, the surety will pay the appellee if the appellant is unable to. In most jurisdictions, the bond not only covers the underlying judgment but costs and interest during the appeal up to some cap typically between 1.2 and 1.5 times the judgment amount.
When you consider that most appeals do not result in a reversal of the lower court’s judgment, this means a high likelihood that the surety providing the appeal bond will receive a claim. Factoring in that the premium rates for appeal bonds average around 1%, one claim could wipe out the premium earned on hundreds or potentially thousands of other bonds. As a friend of mine likes to say, this is bad math for anyone looking to make a return on their investment.
How are appeal bonds underwritten?
Due to the high risk and probability of a claim, collateral in the full amount of the bond is typically required. There are exceptions to this general rule, and to consider providing a bond without collateral, surety insurers review the company or individual’s financial statements to determine if the financial strength is significantly greater than the bond required. If the surety is comfortable that the appellant has the resources to easily pay the judgment (not just today but several years from now when the appeal is concluded), the surety will likely provide the bond with just the appellant’s indemnity. Often this is limited to publicly traded companies, insurers, large private corporations, and very high net worth individuals.
Collateral
The intricacies and options available for securing an appeal bond with collateral is another area often misunderstood by appellate practitioners. It’s important for appellate practitioners to have at least a basic understanding to avoid incorrectly dismissing the possibility that a bond can be secured and therefore, the client can’t stay enforcement.
Read more : What Is a Blondie Coffee
There are four types of collateral that sureties will accept: cash, letters of credit from banks, real estate and marketable securities (stocks and bonds) held in non-retirement accounts. We will go through each one briefly in more detail, and it is important to keep in mind that these forms of collateral can be used in combination with one another.
Cash
Securing an appeal bond with cash is perhaps the most well-known but misunderstood form of collateral. Many quickly think that it must be better for the appellant to post the cash directly with the court instead of obtaining a bond to avoid paying a premium. However, there can be several advantages to the appellant of using cash as collateral to obtain a bond.
The first main advantage is that some sureties will pay interest on the cash deposits, whereas the courts often pay little to no interest. We have even come across courts that charge for the cash deposit. The amount of interest paid by the sureties changes depending on the interest rate environment in the overall economy, but currently, the rates are in the 1-1.5% range per annum. These interest rates are often equal to or exceed the premium rate for the bond leaving the client in a neutral or a net positive position.
We also have a program for larger cash deposits whereby the appellant can invest in short term U.S. Treasuries. Again, the interest rate for U.S. Treasuries fluctuates, but as of the writing of this article, the 12-month U.S. Treasury rate is 2.32%.
One final benefit for using cash as collateral is if the appeal is successful, many jurisdictions allow for recovery of costs on appeal. So, the appellant may be able to get the premium they paid back from the other party.
From a timing standpoint when cash is used, it is wire transferred to the surety, and the bonds can generally be in place in just a matter of a few days. Because of that, cash can sometimes be used to get a bond in place quickly with the intention of later substituting another form of collateral at a later point in time.
Letters of Credit
Letters of credit are provided by banks and are essentially a promise to pay on demand to the surety up to a certain dollar amount (usually equal to the bond amount). Letters of credit are viewed similar to cash by surety companies due to the liquid nature. The surety company must approve the bank, because essentially, the risk the surety undertakes in these scenarios is the bank failing, like many did during the financial crisis, and the surety not being able to draw under the letter of credit. The sureties also have their own letter of credit format that needs to be provided to the bank.
For appellants with established banking relationships, these often prove to be a good option, and a letter of credit can be obtained within a week or two. For those appellants that do not have established banking relationships, the process with their bank is akin to applying for a loan and can take several weeks. In some instances, a bank might require the letter of credit to be secured by cash, and in those cases, it can often be better for the appellant to obtain a bond by directly providing the cash to the surety to avoid paying the letter of credit fee.
Read more : What Does Deferred Sentence Mean
Real Estate
Many are unaware that real estate is even an option to secure an appeal bond. Presently, there are only two surety companies in the marketplace that will accept real estate as collateral for appeal bonds. The sureties will primarily consider residential real estate (single and multi-family) and commercial properties (office, industrial and retail). In some instances, they will accept the raw land in very well developed and high demand areas.
Generally, the sureties will require an appraisal of the property (there can be exceptions) and title insurance, which the appellant is responsible for paying. The sureties discount the value of the property to account for potential market fluctuations similar to how banks don’t loan up to the full value of a property. The overall process can take anywhere from 30-60 days depending on the type of property and size of the bond.
The premium rates charged by sureties for real estate are typically much higher than other forms of collateral due to the illiquid nature and market risk involved with fluctuating values.
Marketable Securities
As with real estate, marketable securities are one of the lesser known options available. Marketable securities are defined as money market funds, stock and bond investments, mutual funds and exchange-traded funds (ETF’s) held in a brokerage account. To be considered by a surety, the assets must contain high-quality stocks and bonds and be held in a non-retirement account. The first step in the process is to provide the surety company with the most recent account statement, so they can review the holdings. The value of the account typically needs to be more than the bond amount. The exact amount the marketable securities need to exceed the bond amount depends on the type of investments. For example, stocks will have to be much higher than a low-risk investment like short term U.S. Treasuries.
After the surety determines the assets are acceptable to secure the bond, they will need to enter into an account control or pledge agreement with the brokerage firm. Many brokerage firms have their own format, but the surety also has a standard form that can be used. This can take several weeks to get in place if there aspects of the agreements that the surety and brokerage firm need to negotiate. If they cannot agree on a mutually acceptable format, the client is generally able to transfer their account to another brokerage firm that has an agreement acceptable to the surety.
When the client uses a brokerage firm owned by a bank, we often advise that they look into having the bank affiliate issue a letter of credit secured by their brokerage account. This can sometimes be the quicker and less costly option for the client.
Conclusion
Just as appellate practitioners would advise a client to work with a specialist in the appellate field, the same holds true for selecting a broker for appeal bonds. The intricacies are many, and those brokers with in-depth familiarity are few. Given what is at stake for the client, getting sound guidance and expertise is paramount.
Click Here to View/Print PDF Article
Source: https://t-tees.com
Category: WHAT
