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(Photo by Win McNamee/Getty)
Ed. note: Donald Trump successfully secured an appeal bond to cover the roughly $83 million he owes E. Jean Carroll. But with other big judgments against him, folks might be wondering “what’s the deal with appeal bonds?” Neil Pedersen, shareholder at Pedersen & Sons Surety Bond Agency, provided this primer on the subject.
Appeal bonds are commonly filed throughout the United States in both state and federal court. An appeal bond is used to stay the execution of a judgment pending appeal. Most jurisdictions require the filing of both the Notice of Appeal and Bond before granting a stay of execution of the Judgment. Most appeals are not bonded and a bond is not required to appeal a judgment. A bond is only required to stay the execution of a judgment pending appeal, but a bond filed without an appeal does not stay the execution of the judgment since without the notice of appeal, the bond is not pursuant to anything.
In the State of New York, there are no safe days prior to the judgment creditor being able to execute the judgment. An automatic stay of the execution of a Judgment is pursuant to Civil Practice Law & Rule 5519 (CPLR 5519). CPLR 5519 requires the filing of both a bond and a Notice of Appeal to allow for an automatic stay.
In New York State, once a judgment creditor has a judgment in hand, they can begin to execute on the assets. Judgment execution includes restraining bank accounts and other assets that will be eventually liquidated and turned over to the Judgment creditor. If the Sheriff or City Marshall is involved, they are entitled to their fees as well which are about 5% of the amount collected or restrained.
In matters where the creditor is very aggressive, it is always suggested to have the bond lined up well in advance of the entry of the Judgment so that it can be filed immediately. My office always suggests having the client prequalified for the bond.
In Federal Court, there are 30 safe days before the creditor can execute the judgment which allows for the judgment debtor to file a bond and Notice of Appeal within that time frame. Once the bond and Notice of Appeal are filed, the attorney for the debtor/ appellant files a motion to confirm the stay of the execution of the judgment pending appeal.
Different jurisdictions have different requirements for the bond amount. At times they are related to the amount of post judgment interest which is going to accrue. Other times they are set by a statute or by court order. In New York State Court, there is no set bond amount. CPLR 5519 requires that the judgment along with costs on appeal be included in the bond. An ongoing cost is the statutory interest that will continue to accrue on the judgment at 9% per year. Clients of my office have chosen to bond either 110% or 120% of the final entered judgment depending on how long the appeal is expected to last. While in federal court, I have seen bond amounts range from 111% of the Judgment to 150% of the Judgment. Post judgment interest fluctuates in federal court but has been less than 9% for over two decades. In the Eastern District of New York and the Southern District of New York, a bond for 111% is regularly accepted by the clerk. This amount is an old clerk rule.
The bond itself is an extension of credit or a financial guarantee of payment pending appeal. The bond is not a risk transfer. In order for an entity to obtain a bond from a surety company they need to decide whether or not they want to provide financial statements or deposit collateral with the surety. There are various reasons why an entity would not want to disclose financial statements. Financial statements would include both a profit and loss statement and a balance sheet. Absent financial disclosure, acceptable collateral can be cash (equal to the bond amount), an irrevocable letter of credit (LOC) (equal to the bond amount), or a pledge of publicly traded blue chip securities (around 130%-150% of the bond amount to take into account market fluctuations).
A common assumption is that surety companies will accept real estate as collateral. Real estate is not a common type of collateral for appeal bonds. Once appeals are decided, the surety has a short window to pay the judgment which is usually around 10 days. The biggest question that will need to be answered is how the debtor will satisfy the judgment if the appeal is affirmed. Real estate is not easily liquidated in 10 days. The value of real property significantly decreases if it is liquidated quickly. Real estate generally has a first mortgage and possibly a second mortgage as well. Both of those mortgages will be more senior to a new security interest in the property. It is not an attractive proposition to be a junior creditor on an illiquid asset.
There are some more opportunistic surety companies that will charge higher rates to issue appeal bonds with securing real estate pledged as collateral. These companies take on select risks and the bond amounts are commonly less than 25 million.
In exchange for an annual bond premium and indemnification – the surety issues the bond. The bond premium fluctuates. To put this simply, the bond premium is the annual cost of the bond or the fee that the surety charges. This generally ranges between 1%-3% per year. The indemnification agreement is the contract that governs the bond.
Surety companies tend to stay away from entities that could have headline and reputational risk. To put simply, they do not issue bonds for companies or individuals that are polarizing or that leave a bad taste in someone’s month.
In the case of the current appeal bond that is needed for former President Donald J. Trump there are several issues that come up. Note that I have not reviewed any financial information nor am I working on his bond.
1. Asset base
2. Headline/ reputational risk
3. Ability to perfect the indemnity agreement
4. Being an individual
There was an old surety industry standard where an applicant would need liquid assets of 7x the bond amount and fixed assets between 15x-20x the bond amount. This is not a metric that is followed by every company but from time-to-time underwriters reference this. Given the media reports of around 425 million dollars liquid and equity in assets of 2.5 billion dollars, he does not quality for a bond without collateral based on his financials.
Love him or hate him, most of the US has a very strong opinion of the former president. For this reason alone, many companies would decline to issue bonds for him. There is also the question of being able to perfect or enforce an indemnification agreement against who could be the next President of the United States of America.
Individuals have had poor track records with surety companies when credit is extended without collateral. Individuals regularly obtain bonds without collateral with that being said, very large exposures such as the exposure in this case makes the decision of not requiring collateral to be a very difficult one.
Absent an enforceable indemnity agreement and being convinced the bond applicant will satisfy the judgment if ultimately required, every surety will require liquid collateral for this obligation.
Neil P. Pedersen, ARM, AFSB is a Shareholder at Pedersen & Sons Surety Bond Agency, Inc. located at 15 Maiden Lane, Suite 800, New York, NY 10038. He’s reachable at Neil@courtbondnow.com and 212.227.7277.
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