Appeals Bonds Can Be Costly, for Both Sides

A very important -- but often forgotten -- part of many appeals is the appeal bond. Often referred to as a supersedeas bond, an appeal bond is not required to perfect an appeal, but rather serves to suspend enforcement of the judgment during appeal.

Let's say your client obtains a one-million dollar judgment against Badcompany, Incorporated. If they appeal without superseding the judgment, you can execute on that judgment during the pendency of the appeal. Sounds great!

But let's say Frivilous Plaintiff gets a judgment against another on of your clients, Goodcompany, Incorporated, for one-million dollars. Your client barely has $1,000,000 in assets. You scramble to try to suspend enforcement of the judgment and get a bond into place. However, when you try to do so, you find out that the bonding company wants a 2% premium per year for the bond, and wants the bond to be fully collateralized. Although you know the judgment is bad and likely to be overturned, this client can't afford the bond. And if Frivilous Plaintiff's attorney, Shady, executes on your client's assets, you are also pretty sure all that money will disappear before an appeal can be determined, and your client will never get it back. Doesn't sound so great now, does it?

But wait, there's more! Let's go back to your judgment against Badcompany, Incorporated. If they do supersede the judgment, and after five years of appeals (it happens) they get the judgment reversed, imagine having to pay their premium as costs. Yes, that 2% premium per year can be considered a court cost, and at least one circuit says there is no discretion but to award that premium as costs. And now, your client, Widow Righteous, has not only lost her case, but is presented with a cost bill of $100,000 plus deposition fees, copying costs, and filing fees.

Surely this simple procedural rule can't cause so much trouble!? Well, it can.

The Ins and Outs of Supersedeas Bonds

Federal Rule of Civil Procedure 62 provides that execution of a judgment is automatically stayed for 30 days, and can only be stayed thereafter by order of the court upon approval of a bond or other security. Local rules usually set the amount of bond, which typically ranges between 110-120% of the judgment, and is meant to cover the judgment, costs, and interest during the pendency of the appeal.

Large, publicly traded corporations and insurers will either self-bond of obtain a surety bond with a favorable premium rate of 1% or so, and without having to provide collateral, since they are not a risk to the surety. Smaller clients, however, face a different battle. Surety's know that appeal bonds are not great risks, because most appeals do not result in reversal. So for clients with any risk of nonpayment down the road, the surety will require a higher premium and that the judgment be fully collateralized, by cash, letter of credit, real estate, or some other reliable asset. Even clients with higher assets will often use a surety instead of posting a cash bond into the registry of the court, because the surety may offer a higher rate of interest on the money.

Once the bond is approved, it can be adjusted over time as necessary to preserve the status quo. After the appeal is final, the bond is either released or used to pay the judgment, costs, and accrued interest.

Unforeseen Consequences of Appeal Bonds

Sometimes, the appeal bond becomes a bigger issue than the appeal. In Texaco v. Pennzoil, there were a number of fascinating legal issues arising from a verdict of $10.5 billion against Texaco. But none of them mattered when Texaco was unable to pay the full supersedeas bond of $10.5 billion judgment plus costs and interests, and instead filed for bankruptcy. Something similar happened in the more recently lawsuit of Bollea v. Gawker. After Bollea was awarded $140 million against Gawker Media, and Gawker was unable to obtain a stay without a bond, Gawker filed for bankruptcy.

Some states have supersedeas caps, both hard-capped on dollar amounts and on net worth. Other reforms are constantly in the works. And most trial courts have discretion in either adjusting the bond or staying execution without bond in several circumstances. But regardless, counsel is wise to consider these bond issues in conjunction with the legal issues of any appeal. If you have a plan in place for a bond or a good argument for a stay without bond, you can make the most of the 30-day stay in federal court to get something in place that will enable you to pursue the legal issues of your appeal without fear of execution.

The appeal bond can also catch the non-appealing party by surprise. Rule 39 of the Federal Rules of Appellate Procedure provides that if a judgment is reversed on appeal, costs are to be taxed against the appellee. Fed. R. App. P. 39(a)(3). Taxable costs include: (1) costs for the preparation and transmission of the record; (2) costs of the reporter’s transcript, if needed to determine the appeal; (3) premiums paid for a supersedeas bond or other bond to preserve rights pending appeal; and (4) the fee for filing the notice of appeal. Fed. R. App. P. 39(e).

This rule is the subject of a matter recently granted certioari by the Supreme Court of the United States in City of San Antonio v. Hotels.com, et al. In that case, the City of San Antonio brought a class action lawsuit on behalf of 173 municipalities against a group of online-travel companies for failing to pay hotel-occupancy taxes. After a month-long jury trial and unanimous verdict, the district court awarded the class $55,146,489 in unpaid taxes, interest, and penalties.

The appellees posted a supersedeas bond to stay execution, and the matter took years to reach resolution just in the district court, which, after several post-judgment motions, entered an amended judgment of $84,123,089. Eventually, the Fifth Circuit reversed the judgment, and the district court awarded costs under Rule 39 in an amount of $2,226,724.37, over $2 million of which was comprised of bond premiums.

While the City of San Antonio argued that the district court should have exercised its discretion to reduce the amount of those premiums, the Fifth Circuit disagreed, and ruled that it had no discretion to reduce the amount of costs. Likely because this ruling is in conflict with other circuits, the Supreme Court recently granted certiorari in that case.

Should the Bonding System be Changed?

As you can see, the current bond system can result in some very unfortunate circumstances, for both sides. Making the system more fair, however, is difficult, because it arose to make things fair in the first place.

In an ideal world, the supersedeas bond protects the appellant from severe loss so a matter can be appealed on the law, and protects the appellee from loss during this time by ensuring full payment of the judgment. The problems highlighted above are being addressed in some states by laws capping or restricting bonds to certain amounts of net worth or even to an amount that will not economically harm the appellant. And permitting discretion in awarding premiums as costs would prevent situations where a well-funded appellant obtains a low-premium bond, posts cash collateral, and actually makes money on that collateral, then gets the full premium back as a cost of appeal when they win.

Both of those solutions, however, have downsides. If a struggling appellant is able to bond for a minimal amount because they are on financially shaky ground, the appellee may be missing out on the only opportunity to secure what assets that appellant has to pay the judgment. And discretion is potentially a slippery slope when it comes to costs of appeal.

But those are issues for the folks who write the rules. Those of us who follow them just need to be aware of how they work, how they can go wrong, and how we can try to protect our clients as best we can.

(No image this week! I am typing this during a short period of time as rolling blackouts cover my state. Rather than search for an image, I'm going to conserve some energy and take care of my family. If you are also affected, please take care and do the same.)