appeal bonds and other asset protection: staying an...

Appeal Bonds and Other Asset Protection: Staying an Adverse Judgment Execution Navigating Supersedeas Bonds and Rule-Based and Discretionary Alternatives

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WEDNESDAY, MAY 14, 2014

Presenting a live 90-minute webinar with interactive Q&A

Michael B. Kimberly, Attorney, Mayer Brown, Washington, D.C.

Brian D. Netter, Partner, Mayer Brown, Washington, D.C.

Joshua D. Yount, Partner, Mayer Brown, Chicago

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Appeal Bonds and Other Asset Protection

Staying Adverse Judgments Josh Yount [email protected] Brian Netter [email protected] Michael Kimberly [email protected]

May 2014

The Importance of Staying an Adverse Judgment

• We live in a world where class actions, expansive liability theories, speculative damages evidence, and run-away juries open the way for truly massive monetary awards and crippling injunctive relief.

• Eight- and nine-figures awards are increasingly common. Ten-figure awards are no longer unheard of. Sweeping injunctions are sought to stop allegedly unfair competition.

• Such judgments can impose significant financial and operational burdens on the losing party, if not threaten its continued existence.

• Promising appeal arguments alone will not save the losing party from those burdens.

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• In federal courts, enforcement of a judgment can begin even before the time to appeal expires.

• Under Rule 62(a), a 14-day automatic stay applies to money judgments, and injunctions can be enforced immediately:

– “Except as stated in this rule, no execution may issue on a judgment, nor may proceedings be taken to enforce it, until 14 days have passed after its entry. But unless the court orders otherwise, the following are not stayed after being entered, even if an appeal is taken: (1) an interlocutory or final judgment in an action for an injunction or a receivership; or (2) a judgment or order that directs an accounting in an action for patent infringement.” Fed. R. Civ. P. 62(a).

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• Enforcement before appeal usually will cause the losing party irreparable harm.

– Bank accounts might be frozen.

– Citation proceedings might begin against the losing party and its business partners.

– The losing party might be forced into bankruptcy.

– Money paid to the winning party might be spent or made inaccessible to the losing party.

– Changes in the status quo might moot any appeal on injunction issues.

• In such circumstances, it is critical to obtain a stay of a judgment.

• Parties should begin to think about how to stay an adverse judgment well before judgment is entered.

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Rule 62(d) – Obtaining a Stay via Supersedeas Bond

• Most straightforward procedure

• Posting a supersedeas bond stays a money judgment pending appeal beyond the 14-day period

• FRCP 62(d): “If an appeal is taken, the appellant may obtain a stay by supersedeas bond . . . . The bond may be given upon or after filing the notice of appeal or after obtaining the order allowing the appeal. The stay takes effect when the court approves the bond.”

• Exception – FRCP 62(e): The court must not require a bond, obligation, or other security from the appellant when granting a stay on an appeal by the United States, its officers, or its agencies or on an appeal directed by a department of the federal government.

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What is a supersedeas bond?

• Black’s Law Dictionary: “A writ or bond that suspends a judgment creditor’s power to levy execution, usually pending appeal”

• Supersedeas is Latin for “you shall desist”

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Why a supersedeas bond?

• The problem: balancing the interests of the judgment creditor and the judgment debtor

• Judgment creditor wants to collect immediately

• Judgment debtor wants to postpone payment

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The judgment debtor’s dilemma

• If the judgment creditor is able to execute on the judgment immediately, the debtor loses the use of the resources during the pendency of the appeal

• Should the debtor later win its appeal, it may file a lawsuit and try to recover the lost resources . . . .

• . . . but a right to recover does not necessarily translate into the ability to recover. The creditor might have dissipated the resources or placed it beyond recovery by transferring it to another entity or foreign jurisdiction

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The judgment creditor’s dilemma

• If the judgment creditor has to wait until the judgment is finally sustained on appeal, the assets might no longer be there to execute upon

• Judgment debtor might in the meantime declare bankruptcy or dissipate assets during the year or more that it will take to resolve the appeal

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The supersedeas bond as a middle ground

• “A judgment debtor who wishes to appeal may use the bond to avoid the risk of satisfying the judgment only to find that restitution is impossible after reversal on appeal.”

• “At the same time, the bond secures the prevailing party against any loss sustained as a result of being forced to forgo execution on a judgment during the course of an ineffectual appeal.”

• Poplar Grove Planting & Ref. Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1191 (5th Cir. 1979).

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Mechanics of posting a supersedeas bond

• Differs considerably depending on jurisdiction

• But generally – File a notice of appeal before or concurrently with the bond

– File the supersedeas bond

– Seek court approval of the amount and form of the bond

• When in doubt, consult with the Clerk’s Office

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Example procedures

• Northern District of Illinois: – Clerk may approve bond—both as to amount and form—

without further order of the court if it satisfies certain requirements. See LR 62.1, 65.1, 65.2

• Northern District of New York – LR 67.1: Seek judicial approval first, then file the supersedeas

bond with the clerk, and serve a copy on all parties. “If a party raises objections to the form of the bond or to the sufficiency of the surety, the Court shall provide prompt notice of a hearing to consider such objections.”

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The amount of the bond – the general rule

• Predecessor to FRCP 62(d) provided that the amount of the bond was to be “the whole amount of the judgment remaining unsatisfied, costs on the appeal, interest, and damages for delay, unless the court after notice and hearing and for good cause shown fixes a different amount or orders security other than the bond.”

• “Although the present rule does not by its terms precisely define the amount and conditions of a supersedeas bond, it has been read consistently with the earlier rule.” Poplar Grove, 600 F.2d at 1191.

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The amount of the bond – often presumptively fixed by Local Rule

• District of Kansas, LR 62.2: “[T]he amount of the judgment, plus 25% of that amount to cover interest and any award of damages for delay.”

• Northern District of New York, LR 67.1(a): “[T]he amount of the judgment plus 11% to cover interest and any damage for delay as may be awarded, plus $250 to cover costs.”

• Northern District of Texas, LR 62.1: “[T]he amount of the judgment plus 20% of that amount, . . . plus $250 to cover costs.”

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The amount of the bond – often presumptively fixed by Local Rule

• Northern District of Illinois, LR 62.1: “The amount of the judgment plus one year’s interest at the rate provided in 28 U.S.C. §1961, plus $500 to cover costs.”

• District of New Hampshire, LR 62.1: “The amount of the judgment, plus interest at a rate consistent with 28 U.S.C. § 1961(a), plus an amount to be set by the court to cover costs and any award of damages for delay.”

• Eastern District of California, Rule 151(d): 125% of the judgment amount.

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The amount of the bond – judicial modification

• The court may, in its discretion, approve a supersedeas bond in a reduced amount. See, e.g., N.D. Ill. LR 62.1 (“The bond amount fixed hereunder is without prejudice to any party’s right to seek timely judicial determination of a higher or lower amount.”); N.D.N.Y. LR 67.1(a); D. Kan. LR 62.2 (“unless the court directs otherwise”).

• Generally, the burden will be on the party seeking a reduced amount to articulate reasons for such a departure. Poplar Grove, 600 F.2d at 1191.

• More on this later

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The form of the bond

• The judgment debtor may finance the supersedeas bond itself if it has the financial resources to do so

• Otherwise, the judgment debtor will need a third-party surety

• Specific requirements differ from court to court

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The identity of a surety

• N.D. Ill. LR 65.1(b) is illustrative:

• (1) the deposit of cash or obligations of the United States in the amount of the bond, or

• (2) the undertaking or guaranty of a corporate surety holding a certificate of authority from the Secretary of the Treasury, or

• (3) the undertaking or guaranty of two individual residents of the Northern District of Illinois, provided . . . :

• (4) An unconditional letter of credit from a financial institution.

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The identity of a surety, continued

• Western District of Texas LR 65.1: cash or government bonds deposited into the Court’s registry or a surety bond issued by an approved corporate surety or an individual resident in the district

• District of Minnesota LR 67.3: deposited into the Court’s registry; a surety bond issued by an approved corporate surety; or a bond secured by real property in the district

• Etc. etc. – consult the local rules

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Special case: approved corporate sureties

• The Department of the Treasury has an approved list of corporate sureties

• http://www.fms.treas.gov/c570/c570_a-z.html

• Treasury reviews applications and approves corporate sureties pursuant to 31 U.S.C. 9304-9308 up to a certain underwriting limitation on a per-bond basis.

– Exceptions allowing greater amounts subject to re-insurance, co-insurance, etc. See 31 C.F.R. 223.10-223.11.

• Generally, a surety bond from any of these entities will be accepted by the court

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Limitations on the court’s power to refuse to accept a bond from an approved corporate surety

• Court have the power to refuse to approve a bond from a corporate surety approved by the Department of the Treasury

• But they exercise that power consistently with the statutory scheme, which vests in the Department of the Treasury the authority to assess and supervise the solvency and financial capabilities of corporate sureties.

• See Am. Druggists Ins. Co. v. Bogart, 707 F.2d 1229 (11th Cir. 1983); Concord Casualty & Surety Co. v. United States, 69 F.2d 78, 80-81 (2d Cir. 1934).

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Limitations on the court’s power to refuse to accept a bond from an approved corporate surety

• In appropriate situations, and on a case-by-cases, the court may decide that a corporate surety is a poor risk.

• “Each surety bond shall be approved by the official of the Government required to approve or accept the bond.” 31 U.S.C. § 9304(b).

• “[T]he district court . . . may inquire into the collateral used to secure a bond written by a corporate surety.” American Druggists, 707 F.3d at 1233.

• Still, in most cases, a bond proffered by an approved corporate surety will be accepted by the Court

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The need to promptly secure a supersedeas bond

• In practice, navigating the procedure in a case with a very large money judgment can be difficult and time consuming

• Requires the immediate attention of the judgment debtor’s counsel and client as soon as it has been decided to pursue an appeal

• Although small surety bonds are still available on short notice, surety bonds for larger judgments may take several weeks or even months to secure.

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The need to promptly secure a supersedeas bond

• While the debtor may still obtain a stay by posting a bond after the automatic stay has ended, any actions taken by the judgment creditor to enforce the judgment prior to the extended stay’s approval may remain effective even after the stay is entered.

• Moses v. K-Mart Corp., 922 F. Supp. 600, 604 (S.D. Fla. 1996) (“Courts have been split on the issue of the retroactive effect of FRCP 62(d) stays.”).

• “The granting of a stay, post-execution, does not make any prior seizures null and void absent extraordinary exigent circumstances.” Moses.

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How to find a corporate surety

• Recall that FRCP 62(a) provides for only a 14-day automatic stay

• Lining up a corporate surety—or multiple corporate sureties—with enough underwriting capacity often takes more than 14 days.

• Ideally should identify, investigate, and begin negotiations with potential sureties even before judgment is entered

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How to find a corporate surety

• Insurers are a good resource for references

• Only a small number of sureties have enough resources for truly huge judgments. E.g.,

– American Home Assurance: $600m

– Travelers : $310m

– Liberty Mutual: $1.22b

– Nat’l Indemnity: $7.9b

– Zurich American: $694m

– Hartford Fire: $1.30b

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Other considerations

• Sureties will generally require 100% collateral for their bonds in the form of cash or a letter of credit

• Sureties have restrictions on how much credit they can accept from individual banks

• Multiple letters of credit from different banks may be required in some cases

– Banks issuing letters of credit will themselves need to perform substantial due diligence

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Rule-Based Alternatives to Full Supersedeas Bonds

• Rule 62 offers several alternatives to immediately posting a full supersedeas bond.

• Each alternative is not always available, but in the proper circumstances, they can provide a valuable way to avoid or delay the need for a full bond.

• The losing party needs to act fast, usually with a prompt motion.

• The alternatives often should be requested alongside any other grounds for a stay, so that the losing party is not stuck if the Court denies its preferred alternative.

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(b)

• Rule 62(b) allows stays pending a decision on post-judgment motions and gives courts greater discretion in setting the terms for a stay:

– “On appropriate terms for the opposing party's security, the court may stay the execution of a judgment—or any proceedings to enforce it—pending disposition of any of the following motions: (1) under Rule 50, for judgment as a matter of law; (2) under Rule 52(b), to amend the findings or for additional findings; (3) under Rule 59, for a new trial or to alter or amend a judgment; or (4) under Rule 60, for relief from a judgment or order.” Fed. R. Civ. P. 62(b).

• Courts ordinarily demand some measure of security from the losing party.

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(b)

• Some courts apply the four-factor test for stays of equitable relief articulated in Hilton v. Braunskill, 481 U.S. 770, 786 (1987).

• Other courts simply ask whether the proposed security for the stay is sufficient to protect the judgment creditor under the circumstances.

• Rule 62(b) motions can be important when the decision to appeal is unmade or more time is needed to arrange the security for a stay pending appeal.

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(c) • Rule 62(c) governs stays pending appeal for rulings that grant

or deny injunctive relief: – “While an appeal is pending from an interlocutory order or final

judgment that grants, dissolves, or denies an injunction, the court may suspend, modify, restore, or grant an injunction on terms for bond or other terms that secure the opposing party's rights. If the judgment appealed from is rendered by a statutory three-judge district court, the order must be made either: (1) by that court sitting in open session; or (2) by the assent of all its judges, as evidenced by their signatures.” Fed. R. Civ. P. 62(c).

• A bond is not necessarily required, but when a stay will harm the winning party, a court will usually want some form security.

• Disputes can develop over the proper amount of security because valuing injunctive relief can be difficult.

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(c) • In ruling on Rule 62(c) motions, courts apply the four factor

test from Hilton v. Braunskill, 481 U.S. 770, 786 (1987), which requires weighing (1) the likelihood the applicant will succeed on appeal; (2) the likelihood that denying the stay will cause irreparable injury; (3) whether the stay will substantially harm other parties; and (4) whether the stay serves the public interest.

• The required “likelihood of success” does not require a district court to find that the appellate court will reverse; often a showing that the case involves a difficult legal issue is enough.

• Counsel should consider whether it might be better to characterize a judgment as an injunctive “order to do” rather than a monetary “order to pay.”

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(f) • Under Rule 62(f), a losing party can invoke more lenient state-

law stay standards in certain circumstances: – “If a judgment is a lien on the judgment debtor's property under the

law of the state where the court is located, the judgment debtor is entitled to the same stay of execution the state court would give.” Fed. R. Civ. P. 62(f).

• State law can offer valuable benefits: – Some states have longer automatic stays (e.g., Mississippi).

– Some states cap the amount of a judgment that must be secured to obtain a stay (e.g., Texas, Idaho, Minnesota).

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Rule-Based Alternatives to Full Supersedeas Bonds: Rule 62(f) • The key question usually is whether the judgment is a lien on

the losing party’s property under the law of the state in which the district court sits.

• Some courts insist that state law automatically transform the judgment into a lien.

• Other courts hold that the rule still applies if “ministerial acts” (like preparing an abstract) are needed for the judgment to become a lien.

• Still other courts consider whether the judgment debtor has property in the state that could be subjected to a lien.

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Discretionary Alternatives to Full Supersedeas Bonds

• A supersedeas bond is meant “to make the judgment creditor as well off during the appeal as it would be if it could execute at once, but no better off.” Olympia Leasing, 786 F.2d 794, 800 (7th Cir. 1986) (Easterbrook, J., concurring) (emphasis added).

– “The function of a supercedeas bond is to protect the judgment creditor’s position from erosion during any period that its right to execute is obstructed by a stay pending appeal.” Id.

– An appeal bond is intended to “preserve the judgment creditor’s position” at the time of judgment; it is not meant to “improve[ ] [its] position.” Id. Yet a “bond assures the judgment creditor of payment in full,” even when the defendant is facing “financial difficulties.” Id.

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• Accordingly, “[w]hen the judgment debtor lacks the assets or credit necessary to pay at once and in full,” the court “should give the creditor less than complete security”—that is, “a partial bond in the amount of the [actual] value of the claim.” Id.

• In a circumstance like that, a judgment debtor may ask a federal court to exercise its discretion to accept some security other than a full supersedeas bond.

• The security may be something other than a bond or it may be a security for less than the full amount.

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• The test for whether a court will accept a security other than a full supersedeas bond varies from court to court.

– Some courts apply the Rule 62(c) test from Hilton.

– Other courts have developed their own balancing tests. In Dillon v. City of Chicago, 866 F.2d 902 (7th Cir. 1988), for example, the Seventh Circuit identified the following factors: (1) the complexity of the collection process, (2) the amount of time required to obtain a judgment after appeal, (3) the defendant’s ability to pay the judgment, (4) whether the defendant’s clear ability to pay makes the cost of bond wasteful, and (5) whether the defendant is in such precarious financial condition that a bond would harm its other creditors.

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Discretionary Alternatives: Alternative Forms of Security

• Courts have accepted various alternative forms of security, most commonly:

– placing cash or equity into an interest-bearing escrow account

– supplying one or more letters of credit (third-party guarantee)

• Such arrangements often will be less costly than obtaining a surety bond.

– Obtaining a bond usually involves paying one fee to the surety and another fee to the bank that supplies the letter-of-credit that the surety company requires.

– Providing security directly in the form of letters of credit eliminates the fee to the surety company.

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Discretionary Alternatives: Alternative Forms of Security

• Alternative arrangements may take a while to negotiate.

• Courts will sometimes extend the mandatory fourteen-day stay to allow a reasonable time for negotiation.

• The judgment creditor may also agree to simply forebear from execution for a time.

• As with any motion, the court is more likely to approve an alternative where the parties are in agreement. A judgment creditor may agree to an alternative security to:

– avoid costs following a possible loss on appeal, or

– obtain an opportunity to negotiate terms that otherwise would be negotiated by the debtor and its bank or surety alone.

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Discretionary Alternatives: Reduced Amounts of Security

• Federal courts may require less than the full amount of the judgment for any reason.

– A full bond may be impracticable when a judgment so dwarfs the debtor’s ability to pay that the bond requirement would unduly endanger other creditors.

– It may be unnecessary when a judgment is so small in relation to the debtor’s assets and ability to satisfy the judgment that the bond requirement and its attendant fees would be wasteful.

– It may be impossible when the debtor can show a present inability to pay the judgment and a good faith but failed effort to secure a bond.

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Discretionary Alternatives: Reduced Amounts of Security

• In all such cases, a reduced bond is in everyone’s interest, including the interest of fairness. A reduced bond may:

– preserve the rights of the defendant’s other creditors and the status quo without granting the judgment creditor a windfall

– forestall the possibility of bankruptcy

– avoid unnecessary costs on appeal

• In the case of impossibility, the judgment debtor generally must show a failed attempt to secure a bond; as little as an affidavit of inability to pay may shift the burden to the creditor to show the debtor’s financial solvency.

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Discretionary Alternatives: Moving the Court of Appeals

• Under Federal Rule of Appellate Procedure 8, a party may ask the court of appeals for a stay of judgment execution.

• A party must first move in the district court for approval of a supersedeas bond before asking a court of appeals for such relief, unless “moving first in the district court would be impracticable.” FRAP 8(a)(2)(A)(i).

• Otherwise, the district court must either have “denied the motion or failed to afford the relief requested.” FRAP 8(a)(2)(A)(ii).

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Proceeding on Appeal without a Stay or Bond: Judgment-proof defendants

• Recall, enforcement of a judgment before appeal may cause the losing party irreparable harm.

– Bank accounts might be frozen.

– Citation proceedings might begin against the losing party and its business partners.

– The losing party might be forced into bankruptcy.

– Money paid to the winning party might be spent or made inaccessible even following success on appeal.

– Changes in the status quo might moot any appeal on injunction issues.

• But what about when none of these things are true?

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Proceeding on Appeal without a Stay or Bond: Judgment-proof defendants

• Sometimes judgment debtors may not have assets within the relevant jurisdiction.

• This is becoming more common as plaintiffs use various U.S. laws to challenge the overseas conduct of entirely foreign entities.

• If a defendant is confident that it does not (and will not) have any assets that could be made subject to a judgment lien, it may decline to post bond and refuse to pay the judgment.

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Proceeding on Appeal without a Stay or Bond: Neither a stay nor execution is necessary to appeal.

• Defendants had no assets in CA, and the bulk of their assets were in NM and TX.

• Plaintiff tried to enforce the judgment in NM and TX, but was denied registration because of the pending appeal.

• Plaintiff argued that defendants had received a “de facto” stay of the judgment and should be required to post supersedeas bond

• Held: “The district court does not have the power to [require] a supersedeas bond, except pursuant to an appellant’s motion to stay.” Terry v. United Funding & Investors, 800 F. Supp. 879 (E.D. Cal. 1992)

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Proceeding on Appeal without a Stay or Bond: Judgment proof defendants and turnover suits

Commonwealth of the Northern Marianas Islands v. Canadian Imperial Bank of Commerce, 693 F.3d 274 (2d Cir. 2012):

• A plaintiff alleges that it holds a judgment for unpaid judgment against two residents of the Cayman Islands.

• It further alleges that the judgment debtors hold accounts at a Cayman subsidiary of the defendant, a Canadian bank

• Plaintiffs served the Canadian bank in the United States, by effecting service of process on its New York branch.

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• The suit involved a petition for turnover under New York Code Civil Practice Law and Rules 5225(b). Under that statute, a judgment creditor may commence a special proceeding:

– “against a person in possession or custody of money or other personal property in which the judgment debtor has an interest, . . . where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor’s rights to the property are superior to those of the transferee.”

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• The plaintiff did not argue that the Canadian bank had direct “possession or custody” of the relevant assets.

• Instead, the plaintiff argued that (i) the defendant had “control” over accounts at its Cayman corporate subsidiary and (ii) “control” is sufficient to meet the “possession or custody” standard in CPLR 5225(b).

• SDNY rejected that argument; on appeal the Second Circuit has certified the question to the New York Court of Appeals. Resolution of the matter remains an open question.

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• Turnover suits technically are against third parties holding the assets of the judgment debtor.

• Still, judgment debtors often intervene in turnover suits, which may be expensive.

• And although the trend is away from expansive readings of turnover laws—e.g., Ayyash v. Koleilat, 957 N.Y.S.2d 574 (N.Y. Sup. Ct. 2012)—there is a chance the third party may be required to turn over assets.

• Particularly when the judgment is small, the safer course may be to obtain a stay and post bond.

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Thank You

Josh Yount [email protected] Brian Netter [email protected] Michael Kimberly [email protected]

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