Fidelity and Surety Alternatives to Supersedeas Bonds Protecting Your Assets During

By Timothy S. Bishop, an Appeal Joshua D. Yount, and J. Bishop Grewell

Until bond requirements The jury has just returned a substantial verdict against are reformed, the legal your client. The amount is excessive. The plaintiff’s legal system should not force theory was weak. And you think that you can win a rever- parties hit with immense sal. But if you want to keep a victor from claiming the spoils before you can remedy the jury’s debtor has appealed the judgment. To stay judgments to forgo their error, time and knowledge are of the an adverse judgment and protect its assets essence—especially in the present eco- during appeal, a losing defendant ordinar- rights to appeals. nomic climate. ily must post security to cover the entire Any party subject to a monetary judg- judgment amount, plus interest and costs. ment—a judgment debtor—may pur- Unless a defendant is willing and able to sue appellate review. To keep a judgment escrow cash or other assets, providing the creditor­—any party entitled to a money required security usually involves obtain- judgment—away from your client’s assets ing a third-party guarantee in the form of while your appeal unfolds, however, a supersedeas bond, sometimes called an requires you to take that action immedi- “appeal bond.” In cases with eight-, nine-, ately. If a judgment debtor fails to satisfy or even 10-digit awards, this requirement the judgment in a timely manner, the judg- can become crippling. In 1987, Texaco was ment creditor may seek to collect the judg- actually forced to file for bankruptcy to ment from the debtor’s assets even if the avoid the bonding requirement for a $10.5 billion verdict. Texaco, Inc. v. Pennzoil Co., ■ Timothy S. Bishop and Joshua D. Yount 729 S.W.2d 768 (Tex. App. 1987), cert. dis- are partners in Mayer Brown LLP’s Supreme missed, 485 U.S. 994 (1987). More recently, Court and Appellate Practice. From the firm’s Philip Morris narrowly avoided having to Chicago office, they focus their practices post a $12 billion bond to stay the execution on appeals and critical motions in state and of a $10 billion judgment. Price v. Philip federal courts. A former associate at Mayer Morris, Inc., 848 N.E.2d 1 (Ill. 2005), reh’g Brown, J. Bishop Grewell is the Appellate denied, 846 N.E.2d 597 (Ill. 2006), cert. Chief for the U.S. Attorney’s Office for denied, 549 U.S. 1054 (2006). the District of Montana. Mr. Grewell Some states have reformed onerous ap- contributed to this article in his per- peal bond requirements. But the lack of fed- sonal capacity. The views in this arti- eral reform in the face of continued growth cle are his own and should not be in the size of damages awards—both puni- taken as representative of Depart- tive and compensatory—can create great ment of Justice positions or policy. difficulties for judgment debtors and their sureties. More than one out of every seven

28 ■ For The Defense ■ January 2012 © 2012 DRI. All rights reserved. jury awards now exceeds $1 million, and postpone paying a damages award until of approved corporate sureties: http://www. in the five years before the 2008 economic after an appeal, the supersedeas bond pre- fms.treas.gov/c570/c570-certified-reinsur-comp. crisis, one in 18 U.S. companies suffered a vents a judgment creditor from enforcing html (last visited Nov. 15, 2011). Depending liability loss of $5 million. Nineteen of the the judgment then dissipating the award, on the local rules, however, a surety does top 20 awards in 2009 exceeded $100 mil- transferring it to another person or entity, not necessarily have to come from this lion. Blockbuster damages awards can lead or placing it in a foreign jurisdiction where list. See, e.g., S.D.N.Y. & E.D.N.Y. Civ. Rule large companies to bankruptcy while even recovery may prove impossible. 65.1.1. In practice, navigating this proce- smaller verdicts may prove catastrophic for At the same time, a supersedeas bond dure in a case with a very large judgment a midsized or small company. The ability to assures that assets are available to pay a can become difficult and time-­consuming stay enforcement of such awards pending judgment if an appeals court upholds it, so appeals is critical. a judgment creditor does not have to worry Challenging economic conditions dur- about the judgment debtor declaring bank- ing the global recession have made it more ruptcy or dissipating or hiding assets dur- Challenging economic and more difficult and costly to obtain a -su ing the year or more that it will take to persedeas bond. One report has noted an resolve an appeal. Appeals of large puni- conditions during the “increasing scarcity” of companies will- tive damages awards will often take sig- ing to consider, let alone issue, superse- nificantly longer. See, e.g., Exxon Valdez v. global recession have deas bonds, calling it the “legal equivalent Exxon Mobil Corp., 568 F.3d 1077 (9th Cir. of a snipe hunt.” The Myth of the Super- 2009) (ending litigation of a $5 billion puni- made it more and more sedeas Bond, The Daily Record, Jul. 16, tive damages jury verdict for an accident 2007. And the Surety & Fidelity Associ- that occurred 20 years earlier). difficult and costly to obtain ation of America warned of the impact A supersedeas bond thus provides secu- of the credit crunch on the surety mar- rity to both parties to litigation. It repre- a supersedeas bond. ket. Aon Surety Marketplace Update 1, 2, sents a procedural middle ground between Spring 2009. Credit-­rating downgrades a judgment debtor’s right to appeal and a and bankruptcies have led to increased judgment creditor’s right to recover. and requires the immediate attention of a bonding costs and more demanding col- The mechanics of obtaining a stay of counsel and the client as soon as a judg- lateral requirements, drastically reduc- enforcement by posting a supersedeas bond ment becomes a possibility. ing or eliminating surety credit for some are not complex. As a matter of right, a industries. Id. Insurer Willis reported an judgment debtor may obtain a stay pend- Staying the Judgment and average premium increase of 15 percent ing an appeal in a federal court by posting Securing the Bond in 2009. Willis Finds Credit Crunch Fall- a supersedeas bond. Under Federal Rule of Although small surety bonds were once out Raises Financial Premiums by 15 per- Civil Procedure 62(d), a judgment debtor available on short notice, modern bonds, cent, Insurance Journal, Apr. 17, 2009. Now simply must file the notice of appeal before particularly for large judgments, may take more than ever, courts need to have sensi- or at the same time as it posts the bond, several weeks or even months to secure. Yet tivity to the burdens of supersedeas bonds and the court must approve the form and in the federal courts a bond seeker only has on would-be appellants, and companies amount of the bond. Local rules often set a two-week window between a judgment’s and their counsel need to understand their the requisite bond amount. Some courts set entry and the time that the bond must be in bonding options and how to manage them the amount as a fixed multiple of a judg- place to stay the judgment. Upon expiration effectively in a tight credit market. ment, while others require a bond to cover of the automatic, 14-day stay that begins the judgment, some amount of interest, and when a monetary judgment is entered un- What Are Supersedeas Bonds? an added amount for costs. See, e.g., E.G. der Federal Rules of Civil Procedure 62(a), Supersedeas, meaning “you must desist,” is Cal. R. 151(d) (setting the bond amount a judgment creditor may execute the judg- a writ, secured by posting a bond, staying at 125 percent of the judgment amount); ment immediately—obtaining orders freez- execution of a trial court judgment pend- N.D. Ill. L.R. 62.1 (setting the judgment, ing a judgment debtor’s assets or taking any ing an appeal. A judgment debtor doesn’t plus one year’s interest at the statutory other action to collect the judgment. While need to post a supersedeas bond to begin interest rate provided in 28 U.S.C. §1961, a debtor may still seek a stay after the au- an appeal. But if a judgment debtor appeals plus $500 for costs as the bond amount). tomatic stay has ended, any actions taken without posting a supersedeas bond or oth- A judgment debtor may itself finance a su- by a judgment creditor to enforce the judg- erwise obtaining a stay of execution, a judg- persedeas bond, but if the debtor lacks the ment before a court has approved the addi- ment creditor can enforce the judgment liquidity to do so, or if a court refuses to tional stay may remain effective even after a immediately. Should the debtor later win its approve a self-­financed bond, the debtor court enters that stay. Because an appellant appeal, it may file a lawsuit to collect its lost will need a third-party surety. And the must file a notice of appeal before a court resources—though a right to recover does choice of a third-party surety is subject to would enter a stay pending an appeal, the not necessarily translate into the ability to court review and local requirements. The 30-day window for filing a notice of appeal recover. By allowing a judgment debtor to U.S. Treasury Department maintains a list is effectively narrowed to the 14-day period

For The Defense ■ January 2012 ■ 29 Fidelity and Surety during which the automatic stay of a judg- natives to a cash- or letter-­of-­credit-­backed tive, no matter how loosely. See Donovan ment is in place. supersedeas bond may be the best and v. Fall River Foundry Co., 696 F.2d 524 (7th In some cases, a defendant may obtain sometimes only way to preserve the judg- Cir. 1982) (characterizing any “order to do,” the plaintiff’s agreement not to enforce the ment creditor’s right to its damages award, as opposed to an “order to pay,” as injunc- judgment for some period after expiration the debtor’s right to an appeal, and the pub- tive). Courts considering applications for a of the 14-day automatic stay while the de- lic’s interest in the debtor’s continued via- Federal Rule of Civil Procedure 62(c) stay fendant makes bond arrangements. But bility. Cf. Texaco, Inc. v. Pennzoil Co., 784 apply the four factor test from Hilton v. unless a judgment creditor is assured of F.2d 1133, 1138 (2d Cir. 1986) (arguing that Braunskill, 481 U.S. 770, 776 (1987), which such forbearance, it ideally should iden- Texaco could not possibly post a manda- balances (1) the likelihood that the appli- tory $12 billion bond given that the world- cant will succeed in the appeal, (2) the wide surety-­bond capacity was no larger likelihood that denying the stay will irrep- than $1.5 billion). The added pressures of arably injure the applicant, (3) whether A supersedeas bond… the current economic crisis on the surety the stay will substantially harm the other market make exploring alternate means of party or parties, and (4) whether the stay represents a procedural securing each party’s interests all the more serves the public interest. A court cannot important. See ASARCO v. Americas Min- mechanically apply the test, no single con- middle ground between ing Corp., 419 B.R. 737, 743 (S.D. Tex. Jun. dition is exclusive, and demonstrating the 2, 2009) (acknowledging that the credit cri- necessary likelihood of success may require a judgment debtor’s right sis contributes to “extraordinary” circum- as little as showing a “difficult legal ques- stances warranting an altered bond). tion.” Palazzetti Import v. Morson, No. 98 to appeal and a judgment Civ. 722, 2002 WL 562654, at *2 (S.D.N.Y. Rule-Based Alternatives to Apr. 16, 2002). A court still must secure the creditor’s right to recover. a Supersedeas Bond opposing parties’ interests through a bond Under Federal Rule of Civil Procedure 62, or other terms, but the terms of the security a judgment debtor may delay or bypass full are within the court’s discretion. tify, investigate, and begin negotiations supersedeas bond requirements in certain Finally, under Federal Rule of Civil Pro- with potential sureties even before a court circumstances. First, Federal Rule of Civil cedure 62(f) any judgment that operates as enters a judgment. A judgment debtor may Procedure 62(b) gives a court discretion to a lien on the judgment debtor’s property want first to approach its own insurers, stay a judgment without requiring a full under state law entitles the debtor to the which will have already acquired much of bond while certain postjudgment motions same stay of execution that a state court the requisite information and performed a are pending. Thus, a judgment debtor in ef- would give. Automatic stays in some states certain amount of due diligence concern- fect can extend the time allowed to secure extend beyond the 14 days allowed by Fed- ing the debtor’s finances. In the case of a full supersedeas bond by filing a Federal eral Rule of Civil Procedure 62(a). See, e.g., an immense judgment, only a handful of Rule of Civil Procedure 50 motion for a Whitehead v. K-Mart Corp., 202 F. Supp. companies have the resources to provide judgment as a matter of law, a rule 59 mo- 2d 525, 529–32 (S.D. Miss. 1999) (apply- surety—including Travelers Insurance, tion for a new trial, or a rule 60 motion for ing Mississippi’s automatic stay while Liberty Mutual, Zurich, Hartford, Chubb, other relief—motions that many losing de- post-­judgment motions remain pending). Ace, and AIG—so a debtor may need to fendants would file routinely to seek to hone Furthermore, most states have judgment resort to using several sureties. Those sure- the issues for appeal—and by moving for a caps that limit the amount that a superse- ties will generally require 100 percent col- stay under rule 62(b). A defendant can file deas bond must cover. See, e.g., Idaho Code lateral for their bonds in the form of cash or such postjudgment motions as late as 28 Ann. §13-202(2) (West 2006) (limiting the a letter of credit. And sureties have restric- days after a court enters a money judgment, amount of punitive damages that an appeal tions on how much credit they can accept but to prevent enforcement of the judgment, bond must cover to $1 million); Minn. Stat. from individual banks, which means that a party must file these motions before the Ann. §550.36(a) (West 2006) (limiting the a judgment debtor may need multiple let- 14-day automatic stay has lapsed. And while maximum required appeal bond amount ters of credit from different institutions in courts have discretion to enter a Federal to $150 million). To access these state pro- some cases. If a judgment debtor uses a let- Rule of Civil Procedure 62(b) stay without tections, however, a judgment debtor must ter of credit, the bank issuing it will need to requiring a full bond, courts ordinarily will prove that a judgment operates as a lien in perform substantial due diligence that may demand some measure of security. the state in which the district court sits, take more than a month. A debtor should Federal Rule of Civil Procedure 62(c) a standard that has produced “fragmen- use a bank with which it has a preexist- permits a court to stay an injunctive order tary” legal authority. Rodriguez-­Vazquez ing relationship to secure better rates on pending an appeal of the order, whether the v. Lopez-­Martinez, 345 F.3d 13, 13–14 (1st issuing fees and to gain a head start on the order granted or denied injunctive relief. Cir. 2003). Some courts will apply Federal bank’s due diligence inquiries. Accordingly, a judgment debtor should Rule of Civil Procedure 62(f) only if state If the awarded damages are large rela- consider carefully whether a portion of a law automatically transforms a judgment tive to a judgment debtor’s finances, alter- judgment can be characterized as injunc- into a lien without requiring the judgment

30 ■ For The Defense ■ January 2012 creditor to take action to perfect the lien. court of appeals, as success with such a do so. A judgment debtor must show that Other courts apply Federal Rule of Civil motion may effectively require a district posting a full bond is financially impracti- Procedure 62(f) if simple “ministerial acts” court to admit that this element of the cable, unnecessary, or impossible because can convert a judgment into a lien, such as standard is satisfied. of extraordinary, compelling, or excep- preparing an abstract from the judgment. tional circumstances. Such circumstances A third approach queries whether a judg- Alternative Forms of Security can arise, for example, when a judgment so ment debtor has property within the state Courts have accepted several alternative dwarfs a judgment debtor’s ability to pay to establish whether a state lien is even forms of security. The most common in- that the bond requirement would unduly possible. A judgment debtor should inves- volves putting cash and stocks into an endanger other creditors, or when a judg- tigate state protection available to it that interest-­bearing escrow account or supply- ment is so small in relation to the debtor’s would trigger Federal Rule of Civil Proce- ing one or more letters of credit. See, e.g., assets and ability to satisfy the judgment dure 62(f) and be ready to offer an affirma- Ligurotis v. Whyte, 951 F.2d 818, 821 (7th that the bond requirement and its at- tive motion invoking state law. Cir. 1992) (accepting a letter of credit); C. tendant fees are unnecessary and wasteful. Albert Sauter Co. v. Richard S. Sauter Co., If a judgment debtor can show that it Discretionary Alternatives to 368 F. Supp. 501, 520–21 (E.D. Pa. 1973) (ac- has a present inability to pay the judg- a Full Supersedeas Bond cepting an interest-­bearing escrow account ment and has made a good faith but failed Rule-based relief aside, a judgment debtor of securities and cash). Such arrangements effort to secure a bond, a court may view a also may ask a federal court to exercise its often will cost less than obtaining a surety reduced bond amount as preferable to hav- discretion to accept some security other bond. For example, obtaining a bond usu- ing no bond at all. It secures at least some than a full supersedeas bond. The security ally involves paying one fee to the surety of a judgment creditor’s interest while also may be something other than a bond, or it and another fee to the bank that supplies staving off the judgment debtor’s bank- may be for less than the full amount of the the letter of credit that the surety company ruptcy, which is in no one’s interest. A judg- judgment. A supersedeas bond is meant to requires. Providing security directly in the ment debtor generally must first show that preserve the status quo regarding a debtor’s form of one or more letters of credit elimi- it attempted but failed to secure a bond, but ability to fulfill a judgment, not to ruin the nates the fee to the surety company. as little as an affidavit of inability to pay debtor financially. In the current economic Alternative arrangements may take may shift the burden to the creditor to show climate, we think that courts will more fre- quite some time to negotiate. Courts will the debtor’s financial solvency. quently exercise their discretion to alter sometimes extend the mandatory 14-day bond requirements and accept alternative stay to make reasonable negotiating time Conclusion means of security. The Southern District available. A judgment creditor may also No one wants to lose a trial, but competent of Texas in an analysis of a motion to stay agree simply to forgo executing a judgment counsel should prepare for the eventuality a nearly $1.5 billion monetary judgment for a time. and plan accordingly, including by devising recently recognized that the global credit As with any motion, a court is more how to meet the security requirements to crisis makes securing large bonds substan- likely to approve an alternative when the stay an adverse judgment execution during tially more difficult than in previous years. parties have agreed to it. Because an alter- an appeal. At the same time, courts need to ASARCO, 419 B.R. at 743. native may cost less than a bond, a judgment understand that adverse judgments during The test for whether a court should creditor may agree to an alternative secu- bad economic times increase the pressures accept a security other than a full superse- rity to avoid costs that a judgment debtor on those suffering the adverse judgments, deas bond varies from court to court. Some may later recover under Federal Rule of Ap- making it particularly important to allow courts apply the Federal Rule of Civil Pro- pellate Procedure 39(e)(3) if the judgment judgment debtors to use reasonable secu- cedure 62(c) test from Hilton. Other courts debtor wins the appeal. A creditor may also rity arrangements. Federal reform of su- have developed their own balancing tests agree to an alternative arrangement to en- persedeas bond requirements that reflects that review the complexity of the collec- sure that it has the opportunity to insist on the realities of modern mega-­awards and tion process, the amount of time required certain terms, such as conditions for draw- the frequency with which courts reduce to obtain a judgment after an appeal, the ing on a letter of credit, as opposed to tak- or overturn them on appeals may be nec- defendant’s ability to pay the judgment, ing the risk that a court will simply approve essary as judgments continue to grow in whether the defendant’s clear ability to an alternative unilaterally negotiated by the size. Until that reform occurs, the legal pay makes the cost of a bond wasteful, and debtor and its bank or surety. Every letter of system should not force parties hit with whether the defendant is in such a precar- credit between the parties should also have immense judgments to forgo their rights to ious financial condition that a bond would an accompanying agreement that governs appeals. Proper planning, aggressive use of harm its other creditors. See, e.g., Dillon return of all letters of credit. the available procedural protections, both v. City of Chicago, 866 F.2d 902, 904–05 rule-based and discretionary, and forth- (7th Cir. 1988). But if the test in the rele- Reduced Amounts of Security right bargaining with the other side can vant jurisdiction includes probable success Courts also have the discretion to reduce or help ensure that when an appellate court in the appeal, as Hilton does, a judgment even waive entirely the full bond require- finally reverses that faulty damages award, debtor should plan to seek a stay from the ment, although most courts hesitate to your client’s assets are still intact.

For The Defense ■ January 2012 ■ 31