How Do Appeals Bonds Work?

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Appeals bonds, or supersedeas bonds, have been in the news recently. And there has been a lot of commentary about how they work, some of right, some of it not so right. What’s the story?

When a trial court enters a judgment for damages, the defendant has a right to appeal. But how does the right of appeal affect the plaintiff’s rights to enforce the judgment? The answer: it depends. In some jurisdictions, for example in the state courts here in Massachusetts, there is an automatic stay of execution or other enforcement actions until the time for taking an appeal has expired. (An execution is a “writ of execution,” the document that you put in the hands of the sheriff that allows him or her to start seizing real or personal property). That’s generally thirty days. Then, if the defendant actually does appeal, in general, “the taking of an appeal from a judgment shall stay execution upon the judgment during the pendency of the appeal.” So in Massachusetts, the defendant can stop enforcement of a money judgment just by taking an appeal, without having to give any security. That can delay execution by a year, even if the appeal fails in the end. Of course, it is open to the plaintiff to seek attachments and other forms of security, but he can’t actually take any of the defendant’s property and spend it, even if he can tie it up.

The rule is different in federal courts. In a federal court, there is an automatic stay for thirty days. But then, if the defendant wants additional protection while he appeals, he has to provide “a bond or other security.” I take it from the news that something similar is true in the New York state courts.

How does this work in practice? I’ve only had to do it a few times. Here is an example from my own experience. My client was a private equity fund in very good financial shape. But it had lost a case in the federal district court and was about the embark on a multi-year voyage to the Court of Appeals (where it succeeded in getting the judgment vacated) and then to the Supreme Court (which denied the other side’s cert. petition), so it had to post a bond. The bonding company required a bunch of financial information and also required that my client furnish collateral in the full amount of the bond. The collateral ended up taking the form of an irrevocable letter of credit from a bank. So the client ended up paying the fees of the company that issued the bond, which were a percentage of the multimillion dollar judgment, as well as the fees of the bank for issuing the letter of credit. I came away with the idea that the appeals bond business is a very good business to be in. Since the surety was fully secured by a letter of credit from a major bank, it was earning a very nice fee for taking almost no risk!

There are rules about the bond. The local rules of the court required the amount of the bond to be in the amount of the judgment plus 10%, to cover interest. They also required that the surety have “a certificate of authority from
the Secretary of the Treasury pursuant to 31 U.S.C. § 9305,” And the bond had to be approved by the court, which means you need to make a motion to get it approved before it becomes effective.

Everyone knows that, with very nominal exceptions and leaving aside provisions having to do with frivolous cases and the like, each party bears its own costs in American litigation. But beware! At least in federal courts, the premium paid for the bond may be recoverable if the defendant prevails. (Probably that does not include the costs of providing security to the surety, so in my example, the premium paid for the bond might be recoverable but the cost of the letter of credit probably would not be). So in addition to nominal costs like the filing fee and the less nominal costs of preparing the transcript , the defendant could be entitled to millions of dollars in cases involving very large bonds. Here’s an example of a case from the Fifth Circuit where that happened.

In the face of these rules, counsel might well want to reach an agreement with the defendant to forego immediate enforcement of a judgment in return for something less than a real supersedeas bond—for example, an escrow, or an agreement about attachments or other forms of security. But the plaintiff’s lawyer may have little incentive to do that if she thinks her claim is very strong, or if she does not think the defendant has the wherewithal to post the bond.

Image credit: Steve Snodgrass (CC BY)

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