What is a Supersedeas Bond?
A supersedeas bond is a specific type of surety bond used in some court cases. It is also called an appeal bond because it is primarily used when a defendant is appealing his or her case to a higher court.
The supersedeas bond serves two purposes. First, it discourages frivolous appeals and ensures the defendant will meet their obligations if their appeal fails. To post an appeals bond, the defendant must provide collateral that meets 100 percent of the initial judgment amount, plus costs. Because the stakes are high, the defendant must carefully weigh whether the appeals process is worth the additional time and expense.
Second, it serves as a stay of execution for the judgment debtor. In other words, it stops the plaintiff from collecting on the original judgment while the case is in the appellate court. Without an appeal bond, the judgment creditor could collect the full amount within two weeks of the verdict.
How it works
For example: Mr. Doe files a lawsuit against Skin Care, Inc., claiming their product damaged his health. The court finds the company is at fault and awards Mr. Doe $3 million in damages. Skin Care, Inc. questions the reliability of some of Mr. Doe’s expert witnesses, so they decide to appeal the case. The company must post a supersedeas bond of at least $3 million, the amount of the original judgment. The appeals bond assures the court that Skin Care, Inc will meet their full obligation if their appeal fails.
Uncovering supersedeas bond benefits
Appeal bonds benefit both defendants and plaintiffs, but are typically only used by the defendant. If a plaintiff loses a case and appeals, there is no judgment to protect or collect. Additionally, the plaintiff only risks accruing more court costs and attorney fees. When a defendant appeals their loss, many courts require this surety bond to ensure the judgment is collected and paid.
There is a very short window between judgment and collection. In Federal cases, the judgment creditor can collect after 14 days. In State cases, the time frame may be even shorter.
Without a supersedeas bond, the defendant must pay as soon as the plaintiff collects. If the case is overturned on an appeal, recovering that money is time-consuming and difficult. The defendant would have to sue the plaintiff in court and win to recover their funds. An appeal takes an average of two years, so recovering the full amount via countersuit is unlikely.
The word supersedeas translates from Latin as “you shall desist.” The appeal bond puts a temporary stay of execution on the judgment during the appeals process. If the court of appeal overturns the verdict, the original court discharges the appeal bond.
At first glance, putting a judgment on hold for a two-year period seems unfair to the plaintiff. However, a supersedeas bond also protects their interests. If the appeal fails, collection is much easier because the bond is already in place. The original judgment also accrues interest, so the plaintiff may receive more than the final judgment amount.
Assessing appeal bond risks
Supersedeas bonds are not without risk. Defendants have the most to lose. Judgments can reach several million dollars or more. Smaller companies may not have the cash, investments or real estate to back a surety bond. Furthermore, if the court of appeal upholds the original judgment, the defendant must pay the full amount or risk losing their bond collateral.
There are risks for plaintiffs as well. For example, a 2009 Alabama case was successfully upheld on appeal. Although the plaintiff received a favorable verdict, they could not recoup all of their costs. The appellate court ruled the supersedeas bond did not include attorney fees amassed during the appeals process.
Appeal bond caps
If a judgment is exceedingly high, it can have a negative effect on both the plaintiff and defendant. In Pennzoil v. Texaco, the court issued a $10.5 billion verdict against Texaco. Texaco attempted to post a surety bond for the full amount and interest several times. The oil giant finally had to declare bankruptcy, and the two companies reached a settlement.
In recent years, 39 states have capped supersedeas bonds to avoid situations like the one above. The limit varies by state, but is usually millions of dollars. The following examples show the variety of appeal bond legislation among various states.
- Wyoming has a $25 million limit. Small businesses with fewer than 50 employees are only required to pay up to $2 million.
- Hawaii’s law is similar to Wyoming’s, but limits small business liability to $1 million.
- Oklahoma defendants who have not signed a Master Settlement Agreement must post an appeal bond of double the judgment amount. However, the court may lower this if the defendant can prove it will cause significant financial harm.
- Mississippi has a three-part limit to appeal bonds. The defendant must post the lowest of the following amounts: $100 million, 10 percent of their net worth or 125 percent of the judgment.
This is not a complete list. You can ask an Expert for more information about supersedeas bond limits in your state.
Obtaining a supersedeas bond
It is possible to go directly through the court to get an appeal bond, but many defendants use a surety bond company instead. A surety bond company may require less money, while the court typically requires the maximum amount allowed by law.
How much does a supersedeas bond cost?
Surety bond companies charge a bond premium, which is a percentage of the bond amount. Typically, the bond premium is an annual percentage rate of two percent. However, the percentage may be lower for judgments that reach the $100 million range.
Choosing the right surety
It is important for the defendant to work with a surety that is acceptable to the court. Most court jurisdictions require surety carriers for appeal bonds to be on the U.S. Treasury Department’s approved sureties list. If the surety is not properly vetted, the court can reject the bond and enforce the final judgment. The short time between verdict and collection makes it doubly important to choose the right carrier.
Meeting collateral requirements
Appeal bonds are high-risk surety bonds, so defendants should prepare for intense financial scrutiny. Large companies with liquid assets like marketable securities or reserve capital may not have to provide collateral. Smaller companies typically must provide full collateral. There are three forms of acceptable collateral: cash, an irrevocable letter of credit (ILOC) or real estate.
A cashier’s check or wire transfer is preferable to cash, especially when dealing with large amounts of money. Surety bond companies will not accept cash if the defendant has a tax lien on their credit report. Cases involving foreclosure and family matters must use a different form of collateral.
Irrevocable Letter of Credit (ILOC)
An ILOC is a written promise from the defendant’s bank that the surety bond company will be paid. It is irrevocable because all parties involved must sign off on any changes. The surety company must approve the issuing bank and may specify the ILOC format. Most bond companies prefer this form of collateral.
Not all surety bond companies will accept real estate as a form of collateral. The property cannot be involved in the court case, and its equity must substantially exceed the bond amount. Generally, the supersedeas bond must be more than $100,000 to use real estate as collateral.
Alternatives to appeal bonds
If the defendant is experiencing credit issues, it may be difficult or impossible to get a surety bond. Because supersedeas bonds are high-risk, they require a high level of financial responsibility. The court has the discretion to reduce the bond amount, but only if the defendant can prove that there are no other options.
Another option involves depositing cash or stocks into an interest-bearing escrow account. One or multiple letters of credit may also suffice. Using these options bypasses the surety and can reduce costs for the defendant. For example, both the bank and the bond company charge fees for an ILOC used to secure an appeal bond. By dealing directly with the court, the defendant can avoid these fees.
It is important to negotiate with the plaintiff when pursuing alternatives to supersedeas bonds. The court is more inclined to accept other options if both parties have reached an agreement.
When all other options fail, the defendant may qualify for bankruptcy. Although it can force a settlement, this is not a desirable option for either party.
No matter what side of a lawsuit you are on, it is important to understand supersedeas bonds and the appeals process. Reviewing your options with an Expert can help you understand what to expect when your case is appealed.