Supersedeas bonds are a familiar concept among lawyers who try cases, but the nuts and bolts of obtaining a bond are often a mystery. In this episode, Court Surety Bond Agency’s Daniel Huckabay joins Todd Smith and Jody Sanders to explain how judgment debtors may apply for a bond, the basic premium structure, and the types of collateral sureties consider in the underwriting process. Dan also discusses the importance of acting quickly when a client faces an adverse judgment and the advantages of preparing for that possibility in advance.
We have with us, Daniel Huckabay from Court Surety Bond Agency. Welcome to the show.
It’s great to be with you.
We talked about supersedes issues a few times on the show, and we happened to have a good contact over there at CSBA. For full disclosure purposes, we need to let everybody know that your company is one of our two original sponsors of the show.
We are glad to be a founding sponsor.
We are too. We’re grateful for you helping us out to make this thing.
Why don’t you tell the readers a little bit about yourself and CSBA from a broad perspective? What it is that you all do?
Court Surety Bond Agency started in 1984. We specialize in surety bonds. An interesting fact to the readers is surety bonds is a part of the insurance industry. It represents a very small fraction, which is about 1%. We further have a narrower focus than just surety bonds, which is specializing in supersedeas bonds. That’s a tinier sliver, representing about 2% of the surety industry. That’s our whole business. We work with attorneys throughout the country and all state and federal courts.
You mentioned surety bonds being the broader industry. Are you all doing construction bonds, for example, as well?
Yes, we do.
That’s good to know. Our focus is on supersedeas, but there are occasions where appellate lawyers and Texas trial lawyers need to get other bonds, like a temporary injunction bond for example. You’re a bond broker, is that right?
That’s right. We represent 35 different surety companies. They’re essentially insurance companies in the industry that provide these types of bonds. Those companies range from household names like Liberty Mutual, Zurich, to more independent companies that are maybe smaller, privately owned, that may focus on that one product.
Let’s talk about the average situation, if there is such a thing, in which your company gets called. Give us an overview of what supersedeas is for those reading the show who don’t have a deep familiarity with it. In Texas, we use that term to describe essentially securing a judgment against execution. Once there’s been a final judgment rendered in a case in which liability has been finally determined. There are a judgment creditor and a judgment debtor. The function of a supersedeas bond is to preserve the status quo while one of the parties is pursuing an appeal.
That’s right, and also to protect the judgment creditor from the risk that the judgment debtor may go and solve it, suffer some financial setback, or move assets around during the course of the appeal in the event that they’re not able to execute because it stayed. There are four main ways you can do it in Texas under the TRAP rules and the CPRC. One is a written agreement between the parties, which is great if you can get it. I don’t know that I’ve ever had that in a case where there was a damaged judgment. There are supersedeas bonds. There’s a cash deposit in lieu of bond, which is great if you have a client that can cut a check and part with it for two years, for whatever the bond amount is.
The fourth one is alternative security, which is a little bit murky and nebulous. No courts have told us what that is. My best guess is if you’re somebody that has a lot of unencumbered assets and you don’t want to go through the collateralization process. You can get a court to approve it. You could post that as security. I have not seen that accomplished yet. There’s a possibility for that out there. Supersedeas tends to be the most common with cash deposit behind it, depending on the circumstances of the judgment.
Tell us from your perspective, what do you ordinarily see when you have said a judgment debtor is coming to you? What’s the process like for them if they’re going to come to Court Surety Bond Agency and say, “I’ve decided, I’m not going to put up a cash deposit or use one of the other methods available under Texas law. We’re going to post a bond?” What’s the next step?
The first thing we encourage attorneys to advise their clients on is to explore the options as early as possible. Oftentimes, that might even mean before a judgment is entered because that additional time that they get can prove valuable depending on what their circumstances are. After they’ve made that step and they’ve decided to explore, then when someone calls, the first part of the process is to find out what’s the anticipated judgment amount? What’s the timeframe we’re looking at? When does the judgment get entered? Are there any post-trial issues that are going to come up that could delay and give added time? Once we know those two things, then we talk about the profile of the client. Who that client is, that’s going to determine whether collateral is required or not to obtain the bond.
There are publicly traded companies, insurers, or large private companies, or even high net worth individuals that can sometimes qualify for the bonds without providing any collateral. That becomes one route. If we determine that may be the case, then we’ll often get the necessary financial statements from them to determine that and explore that avenue. In the other cases where the collateral is required, then it’s going through each of the options for collateral. There are four types of collateral that can be used to secure a supersedeas bond: cash, letters of credit from a bank, real estate or stock/bond portfolios, and non-retirement accounts.
We’re talking about cash deposit being an option within the Texas rules, but then you’re talking about it as a separate idea in terms of cash collateral to provide to the surety. Would there be an advantage to posting cash through a surety as opposed to posting a cash deposit and putting the money in the court’s registry?
It’s the most common question we get. There can be. What we typically find in cases that are under $200,000 or $300,000, it makes more sense to post the cash directly with the court. When there are cases that are larger than that, then there can be different circumstances that come into play. One of those circumstances in the environment is, surety companies pay interest on cash deposits. There are times when the interest rate environment is higher than it is where the interest rates paid by the surety is enough or maybe exceeds the premium that the client is paying for the bond. It makes sense for them financially, even though they’re paying a premium, they’re getting enough return on the cash that they’re as good or better off going to the bond process. Even if it’s like an equal to the situation, sometimes people prefer going to the bond route because the mechanics of filing a bond are a little bit more well-known or people have concern over putting significant sums of cash with the court. That’s more of a personal preference. We’ve encountered all those situations.
One of the other most significant factors would be when cash is used as a bridge or a temporary situation to buy the time to stay enforcement of the judgment and then substituted later on for another form of collateral that might take longer. We’ve done that with letters of credit or real estate. One time we had a company that had a parent that was based in Europe and we couldn’t get the financial statements in time from the parent that was going to indemnify. We got cash provided by the bond, later on, we got the financial statement confirmed that their indemnity was sufficient to provide a bond without any collateral. The surety company returned the collateral.
In Texas, you can put up a cash deposit, but you have to go and ask the court, at least here in Travis County, to put it in an interest-bearing account. The interest, as you suggest, is not something that you’re going to retire on, even if it’s a large judgment. If the economy’s maybe a little healthier and you’re able to make some money on the interest that’s going through the surety, you might be able to offset your cost even if you’re posting a cash deposit or cash bond, you would call it in that situation.
Depending on the interest rate environment. There are some interesting and creative tools, one is, the sureties have their own program where they’ll pay simple interest. The other sureties that we have are programs where they are able to put it in an account, let’s say a Raymond James or Wells Fargo. They can invest in certain things like treasuries or municipal bonds. They’re able to compare what the returns on those investments might be. They’re going to be stable and safe options. The surety is not going to allow investments and options that may fluctuate too greatly, but it presents other options for the clients to consider.
You mentioned cash, a letter of credit, and real estate. I believe in surety, it’s the four types of collateral that you all look at. We ought to touch on each one of those for our reader’s benefit. Was there anything more about cash or are you ready to move on to a letter of credit?
That’s sufficient for cash. For those people that might be reading and aren’t familiar, letters of credit are provided by banks. They’re a financial instrument. They’re a letter where the bank is making available a certain amount of funds to the surety company. There are no funds handed over to the surety company in that case. The surety company could make a demand against that letter of credit at any point in time if there was a claim against their bond.
The sureties like these because they are somewhat safer than cash in a way that might be counterintuitive. The big risk with cash is the bankruptcy preference laws. The sureties can be at risk to lose those assets if someone files bankruptcy. With the letter of credit, they have the same liquid nature as cash, but the surety doesn’t run into those bankruptcy preference issues. The real risk for the surety in these cases is whether the bank is solvent at the time that a demand is made. That sounds like a remote risk, and it can be. If you think back to the 2008 Great Recession, it certainly has happened in the course of our history. There have been times where banks have gone out of business. Sureties have been left holding letters of credit that they couldn’t draw on. Because of that, the sureties do have to approve the bank that’s being used. The only other step to it is the sureties have their own formats for the letter of credit that we end up providing to the client, their bank. They are not much of an issue in terms of the agreement between the two parties.
In terms of timing, it seems like a letter of credit may be advantageous for the client who’s coming to you because, if they’ve got a preexisting relationship with their bank and the bank maybe has appraisals on the real estate or already holds some of their securities and their cash, you’re taking a step out of the underwriting process. They come with the letter of credit which automatically goes through the surety process without you having to do the backend work of appraising real estate, getting financial statements, getting all that stuff that would normally build in time to the process.
A lot of times, especially for companies with existing banking relationships, they have ongoing banking relationships where their banks are familiar with their assets, their operations. They already may have credit facilities in place. A lot of the underwriting has already been done from that standpoint. It doesn’t mean there are things that won’t need to be done in order to get the letter of credit from the banks. It can be a quicker process to go that route rather than starting from scratch for the surety company. That also highlights another point that we mention to people. If you don’t have an existing banking relationship, letters of credit might be a little bit more difficult and time-consuming. It’s like applying for a loan. That’s something to consider.
It doesn’t mean it can’t be a good option for a company or individual that doesn’t have those types of relationships or credit facilities established. It’s something to factor into the equation. We do find letters of credit, especially on the individual side. It can be good for people who might have accounts like brokerage accounts with a company like Merrill Lynch that’s tied to the Bank of America or Wells Fargo. They have a brokerage account there because they’re attached from a banking standpoint. What those banks can do is they can use the brokerage account with the stocks and bonds in it to secure the letter of credit without having to liquidate any of those assets. That becomes a quicker and easier way for the client to get the letter of credit, even if they don’t necessarily have that facility in place.
Do banks charge either a fee or a premium of their own to do the letter of credit and leave that in place?
They do. There is that added cost to it. It’s similar to a bond premium in the sense that it’ll be an annual fee during the course of the letter of credit outstanding.
That’s always something good to keep in mind as you’re thinking through the costs.
If you have gotten into a situation where you can get a letter of credit quickly, that might be a possible bridging tool to use. If you need something in place relatively fast, you already had that banking relationship, and then you could get a letter of credit ready to go. When the judgment becomes enforceable, you could get it on file, if necessary, approved by whichever court you’re in and a long-term for an appeal that’s going to last years. It would depend on the case, wouldn’t it? Whether someone would want to rely on the letter of credit and renew it as opposed to renewing, let’s say, a supersedeas bond that’s secured by some other asset.
A big part of what we end up working through with clients is understanding, first of all, what assets they have available. What their preferences are. Everybody’s different. You will have one client that may want to use a letter of credit and for another that would not be an ideal situation, even though they might have access to it, because maybe they have a borrowing capacity and they don’t want to impede that borrowing capacity. Stepping in each of those different categories and then also layering that in with the timeframe that they have to post this bond. While they may have a preference, they have to prioritize and make sure that their assets don’t get pursued under the judgment. There’s a combination of factors that have to be considered.
In Texas, we have the benefit of a 30-day window after the judgment is signed or it can become enforceable. That can be extended out with the post-judgment motion easily. The times I’ve done this is in federal court, you better get everything in line because that judgment is going to become enforceable in ten days or something like that. It’s a short timeframe.
It was fourteen and they’ve moved it to 30 which is helpful. There was a big deal when they changed it to 30 days because with only fourteen days, that’s hard to do a lot of this stuff.
In Texas, you have the benefits of the caps. You cannot buy a little bit of time trying to figure out how the caps play. In the federal court, you need to bond the judgment. There’s not a whole lot you can do about it.
There are supersedeas rules that changed back in 2003. In the old days, you were talking about having to bond the amount of the judgment, and now in Texas, it’s bonding the actual compensatory damages and the judgment interest for the duration of the appeal. The third one is the cost. The costs never seemed to be a big factor. That’s why I keep repeating it.
That’s not where the fights are. You have the net worth alternative, half of your net worth, or $25 million maximum caps. There’s a lot of fights over net worth too.
We do a lot of litigation in Texas over the amount of the bond. I’m sure it happens in other places. I’ve had it happen in federal court but the fight is not over. It’s not set in stone because the judgment’s been signed. What the amount of bond is going to be. You also mentioned real estate. How does that work in using real estate as collateral?
Real estate is one of those lesser-known options. As you can imagine, it’s one of the more important options that are available. You can think of it as the same process that a lender goes through when they evaluate a piece of property. What its value is? How much equity is in the property? What does the surety company do? It’s where they place a data trust on the property to secure their position. The first step that surety will do is, we will get the address and details on a particular property and provide that to them, to see if it’s worth taking to the next step, which would be an appraisal. An appraisal is required in every instance. There can be some exceptions if a recent appraisal has been done or the value is overwhelming relative to the bond amount. Once that comes back, if it confirms the value and the amount of equity that’s in the property, then the surety goes through that process of placing the data trust on it. The bond is issued based on that. There’s a wide variety of real estate that can be considered too, residential, commercial or multifamily.
We’ve done retail centers. A lot of different types of property that will stay away from those specialized properties like a hospital that’s highly regulated. We had a winery once, that’s unique in that the number of buyers for a winery wants things. They’re not in the real estate business. The number of transactions they do relative to a large mortgage company is going to be a tiny fraction. They’re looking for a property they can easily assess the value, that they know. In a worst-case scenario, if they had to sell it, they have to have a market to be able to sell that property.
That tends then to narrow it down to those types of properties and also the location being paramount as well. Properties that are custom-built in an area that is not densely populated, it doesn’t have a lot of comparable sales. Those are going to be more difficult. A lot of times we come across ranches in Texas. Those can be challenging. They have a lot of worth but for a surety company to evaluate, it’s not practical. More of the suburban homes or those other commercial type properties and densely populated areas are going to be the more likely candidates.
Real estate seems like the place where timing and getting your ducks in a row becomes important because the appraisal process takes one of the longer leads in terms of time than any of these other assets. You want to get it done before the judgment creditors have attached their judgment liens because that makes it even more messy.
The appraisal process and everything does make it the longest. It can vary, residential is going to be faster than commercial because the appraisals take longer on commercial. You often find unexpected things when you pull title reports, liens that people didn’t know about that have to be cleared and little nuances that don’t stop the process, but make it take a little longer. Anytime anybody indicates that real estate is an option that they want to consider, that’s an area we oftentimes push for getting started as early as possible. A lot of times with real estate, what people don’t realize is that a bulk of the process comes in with identifying the property, getting a preliminary indication from the surety company, and pulling the title. Pulling title is a few days’ process and it costs $100. These aren’t big expenses. Getting quotes on the appraisal, all of that can take a week or two to do that.
The cost is nominal in the grand scheme of it. We encourage people to start on that. We’re always more than happy to do that footwork because we understand the realities of these cases that staying enforcement is critical. When it comes to pulling the trigger on an appraisal, it’s a matter of personal judgment. I can tell you when you’re facing multimillion-dollar judgments, you’re paying $500 or $1000 for an appraisal. From my standpoint as a client, I’m sure they get exhausted going through these things, but are small dollar amounts to end the process closer. Once you have the appraisal done and everything is signed off, then from there, it’s quick to get the bond in place. Everybody’s got to make their own determination as to how far they want to take that process. We encourage people to take it as far as they can or are comfortable with it because it will put them in the best position to pull the trigger on the bond quickly.
Is there a formula that bond companies use for how much real estate you need for a particular bond? For example, they’d want for a $100,000 judgment, more than $100,000 worth of real estate. Is there some formula that you want to keep in mind when you’re trying to figure out what properties you can put together?
That’s important to think about. I always use the analogy of residential lenders, when we get a home loan, we don’t want to loan up to 100% of the value of the property. Surety companies are the same way because part of what they’re looking at is that there could be fluctuations in the value of a property over the course of a two-year period while that appeal is pending. The rule of thumb is residential properties have discounted the value by about 20% on average, maybe a little bit more depending on the circumstances. Commercial properties can be discounted anywhere from 30% to 50%. It depends on the circumstances with that particular property.
That falls in line if you look at lenders. Most lenders on commercial property will only loan up to 60% of the value, on commercial, maybe 70% in some rare cases. They follow the same patterns as banks do, in that regard, in terms of how they discount the value of the properties. Whatever debt is against the property they subtract as well. That’s how you come up with the equity. To your point, you might have a property that’s worth $500,000, but by the time it’s discounted and a mortgage is subtracted, there might only be $100,000 or $200,000 worth of actual equity in the property. That’s one of the things that we can do upfront without incurring any costs, is getting addresses for properties. Understanding a little bit about what they are, seeing if we think it’s in the realm of possibility for it to be used. If there are multiple properties, which ones might need to be included? That at least starts to pave the way for what’s possible and what timeframes the client might be looking at.
That’s bad enough if you’re looking at a large money judgment, but then you’re looking, by the time you apply the discounting, the collateral that you might have to make available to secure the bond could be considerably more than the actual amount of the judgment, potentially.
One thing I didn’t mention, and it’s important, is that collateral can be used in combination with one another. There is another reason for bringing back cash into the equation. People will sometimes have a property that has a little bit of debt on it. It’s borderline whether it’s acceptable to the surety company. The client can add some cash to that collateral that they’re offering. That makes up the difference. Those are avenues we will look at as well to see how those things can be pieced together.
How do securities fit into this? We’ve covered cash, a letter of credit, and real estate. Securities were the last item that we haven’t talked about yet. The other security is ordered by the court as another way of securing a judgment in Texas. What people will do is, what we think of as securities, they’ll offer those to be deposited into the court’s registry. You’re talking about taking on commercial paper and things like that, I assume.
Yes. If people have an account with Merrill Lynch and a non-retirement account, they have stocks, an index fund, some bonds, municipal bonds, or treasuries. What the surety company can do is work out an agreement with that brokerage company to have an account control agreement where they are pledging that account as security for the bond. What that allows them to do is keep those assets in that actual account. A lot of times the surety will allow them to continue managing the account trading so that they can continue to earn their investment returns. One of the other advantages is it doesn’t force them to liquidate the account and incur any tax liability or forego the investment returns that they would have earned.
What about non-public securities? A lot of people that have their money and a smaller family business or a partnership, those types of things, are those things that could be feasible? Or if there isn’t a market, it makes it hard to use?
There’s not a market. They’re not feasible to use. Those are instances where it goes back to that letter of credit option where the bank is in a better position to evaluate the creditworthiness of a company or a small business because they have other loans to that business. They know their financial wherewithal, their assets, and have known the people for years. It’s something that can be overlooked with some of these surety companies. It can be true. This is a transactional relationship where this might be the only time that surety or that client work together. There’s not, unfortunately, a lot you can base on other things, like the character, that in some other forms of surety bonds can be an important factor.
With these cases, it’s more of an analysis of, “Does the client have the wherewithal? How significant is it relative to the bond that’s being requested?” In those cases where the wherewithal is so significant that it’s a foregone conclusion, the client’s going to be able to pay for it themselves. Those are the instances where the surety will extend the credit without needing collateral, but in all those other instances, then the option is to take the collateral. There are times where it can fall somewhere in between. We have had circumstances where surety will accept 50% or 75% collateral. Those are not all that common. It’s an all or nothing scenario, but there are those circumstances where it can happen.
I’ve heard for years that in your industry, that full collateralization is a must. You want a few exceptions to that. That’s one of the questions that clients ask, “What am I going to have to do to get a bond?” I was advising them, “You got to be prepared to put up collateral.” This discussion has been helpful for them to know. Not only the clients but also other lawyers, the trial lawyers, in particular, to know the things that can be pledged as collateral. The other major issue or question that comes up as well is, “What’s my premium going to be?” I know that varies a little, but my recollection of what I understand to be the industry standard is somewhere between 1% and 2% of the judgment amount. Is that correct?
That’s a fair estimate or range, although it does vary by the type of collateral. We’ve had a couple of publicly traded companies that had large bonds and the bond amount can influence the premium rate in certain circumstances. These couple of public companies needed large bonds and the premium rate was almost 0.25%. It was low. It’s based on their financial strength and the fact that it’s a larger bond. With cash and letters of credit, 1% to 2% is a fair range. With cash, you can have more letters of credit. If the bond size is large enough, it can go lower. Real estate is the most expensive option due to the illiquid nature of the collateral and the cost of putting it in place. The rate for real estate is 4%. With marketable securities, it can range depending on the type of assets. If it’s all treasury bonds, which are fairly liquid and safe, the rates are going to be on the lower end of that 1% to 2% range but if it’s an S&P 500 Index that can fluctuate significantly. If there are more risks that the surety is undertaking, then they’re going to charge a higher rate in the 3% range.
That’s a renewable annual premium if I recall correctly.
It is. The first year is fully earned and then for any renewals there is a prorated return premium if the case is concluded midterm.
That’s one of those things that’s important in Texas because you don’t get your premiums back if you prevail on appeal, whereas, in federal court, you do. That’s always an important cost to think about as the judgment debtor because that’s something you may not see again if you’re in Texas State Court.
Appellees in federal court, they forget all the time because if they’re used to practicing in the state court where the bond costs are not a cost, or recoverable cost. That can be a pretty big shock if you’re not prepared for it. It’s something to alert lawyers to, is be wary if you’re in federal court. If you lose and you’re happy, it can be bad for you.
We talked a little bit about the importance of timing. I’m making sure that you’re thinking through these things early on when it looks like you’re going to get an adverse judgment entered against you, and maybe there’s not. Is there an amount of time that you tell people to plan for the application underwriting process for getting a bond?
For each situation, there’s a general timeframe. If we’re dealing with situations where no collaterals are involved, it’s a strong financial situation, a week is more than enough time. We’ve turned bonds around, 1 day or 2, depending on how quickly people can get us back information. With cash, it’s going to be the quickest out of all the four options because it can be wire transferred. All it requires is signing documentation and issuing the bond. That can be done in a week, is feasible in that instance, or even shorter.
Letters of credit depend on the relationship with the bank. Even those companies that have established relationships, because of the process that the banks have to go through in terms of their own internal credit, oftentimes I see them take a couple of weeks, even three weeks. There are some exceptions to that if there’s somebody that already has a letter of credit facility established. For the most part, 2 to 3 weeks is a safe guideline. In real estate, we generally tell people anywhere from 30 to 60 days. That’s going to vary, if there are appraisals already available, or it can be waived or what have you, but, 30 to 60 days is a good range. Thirty days on the marketable securities option.
Those are long horizons. The federal deadline lines up more with the state enforceability. If you’re talking to a period that’s not short enough to prevent the judgment from ever becoming enforceable. That’s going to be a strong influencer in the type of security that the judgment debtor’s going to want to post.
Part of what can be important there is, people only have one form of collateral. They might have real estate. They only have one option. If that’s the case, then they’re stuck with whatever timeframe that’s going to take. We always try to do whatever we can to expedite, but that’s another one of those things that people are getting educated about early on. The goal of doing things like this or presentations around the country has always been to educate attorneys so that you all can educate your clients in the event of these circumstances.
The biggest thing you need to know after hearing this is to start early and educate yourself on the process. Once you know that, you can match the two things up. If people leave this show with anything, hopefully it’s that then they can at least get a jump on the process. Know what the requirements are, even if they have to revisit it at the time of a case because it might be a few years from now, by that time, the people reading this show might encounter this situation. People don’t need to remember all the details as much as there are certain timeframes and be cognizant of those when these things come up.
There are certain presentations and shows that are evergreen content. This is going to be one. I have a few more questions that I want to ask you. This is going to be one that is going to be beneficial to refer back to. I’ve learned more about the types of security that you all look at than I ever knew before. Helping a client to get a bond, it sounds like that bond agencies and supersedeas companies are like appellate lawyers. You want to have one in your Rolodex that you can call whenever the need arises, even though the need doesn’t necessarily arise frequently.
Jody and I talk all the time about our job, we’d like to talk with other appellate lawyers and judges on our show, but we want to educate trial lawyers about the best way of going about things. This is part of that educational process that the role that we play is being a resource. It’s extremely valuable to have this information available to the folks who are going to read this show. The idea of early preparation is a theme that we echo a lot on the show. It does pay to be prepared. Even if it means being prepared for a potentially bad outcome. If someone’s going to take a case to trial, you’re putting your case in the hands of a jury. You don’t know which way it’s going to go. It would be smart for a litigant who is being exposed to a potentially large judgment to have done some homework on this, even before the case goes to trial.
It’s one of those rare circumstances in life where the stakes are high, to do the research, it doesn’t cost anything. The preparation is not a huge hurdle to get over. The benefits of taking those proactive steps can be monumental. And something else you touched on, we are similar to the legal industry, there are generalists and specialists. That’s the only other thing I would comment to people. Make sure to go to a specialist like you want to go to an appellate specialist. You want to go to a specialist in these types of bonds. Unfortunately, you touched on not having heard a lot of this information before.
It’s one of the downsides of our industry, that it’s small to begin with, that you take to carve out this little piece of it. It has been ripe with misinformation, not intentionally, it’s just that you have people that are more generalists in our space that don’t do this all the time. They then communicate what they know to the appellate community. That becomes the basis for what everybody understands of how this process works. It means there are a lot of clients out there that hopefully don’t forego the appeal, but maybe don’t go through the process in a manner that they could have otherwise.
This is something that you all do in selecting the agencies that you all work with. How important is an AM Best rating in selecting the surety?
Our company will only work with insurance companies that have AM Best ratings with A or higher. That’s one area that’s of critical importance. Having a B rating can mean that the insurance company is under financial stress. There is a higher likelihood that maybe they won’t be around. If they’re not around then that can cause significant issues. As far as the degree of the A rating, they further classify those as AM Best ratings on financial strength. Most of the companies we use are in the upper echelon of those ratings. It has not become much of a relevant factor and how often we have to consider it. There’s that somewhere it might be on the smaller end, but as long as they have that A rating, it’s not been an issue from our standpoint.
A bigger consideration to follow up on, that is the federal court requiring the sureties to be listed on the department of treasury listing. That’s an important factor because otherwise the bond, regardless of the AM Best rating, if they’re not listed on that department of treasury, they’re going to get rejected. We only will work with surety companies that are in that department of treasury listing.
What you can take away from this if you’re reading is, if you talk to a surety supersedeas broker like CSBA, going back to that specialization or expertise, they’re going to know all this stuff like, “Dan’s able to rattle off what’s required in federal court, off the top of his head.” Even those of us, as lawyers who do this, not infrequently, sometimes forget about these things. I support the notion of, “If you’re going to be in a situation where you’re having a bond of judgment, it makes sense. If you’re in a case, it’s important enough to go up on appeal.”
It makes sense to have an appellate specialist work with you. The same thing with the bonding company. You got to do a great job of filling that niche and making it easy. Do you have a specialized application process? How does that work if someone wants to reach out to CSBA and say, “I’ve got a judgment against my client? I want to put them in touch with you.” How do you go about initiating that process?
It varies based on preference. Half the time we’re dealing with either trial or appellate counsel directly and may not even be interfacing with the client. There’s the other half where we’re dealing with the client either directly or a combination of the attorney and the client. What we recommend that people do is when there’s a need, give us a call. Even if the judgment amount is not entered, it’s not known as 100%, if we’re working with a range, we can then at least start the discussions. That’s where it has to begin as is going through that process about evaluating timeframe assets that are available and whether collateral is going to be required. Once all that’s determined, then we can specifically lay out the next steps in terms of the paperwork that’s required. We don’t have an application that we need. It’s fairly simple. We simply get a copy of the court complaint. The judgment, once it has been entered, and then the notice of appeal. Those are the main documents that we get. The only additional thing we might get is financial information, if it is one we’re trying to evaluate without collateral.
Once you’ve gone through the process, the bond is in place, the appeal doesn’t happen, but whatever. It’s over with. Walk us through how the process goes if the judgment creditor makes a claim on the bond? Procedurally, what happens at that point?
Going back to Todd’s question about the sureties that we choose to work with more often than not, our decision to work with sureties is most of them have a fairly strong rating. Our bigger consideration is working with surety companies that have good legal departments, underwriting departments, and can handle and know what to do when these claims are made or when we’re trying to close out a bond. That’s the other area that we hear the most frustration with when it comes to attorneys. There are these incredible inconsistencies with what people are told is needed in order to close out a bond.
As it relates to the claims process, the typical steps are that the attorneys will reach out to file a claim with the surety company directly. Sometimes we’ll end up getting looped into that since we’re the ones that issued the bond, but in that case, we end up putting them in contact with the surety companies, claims department, and their legal department. What they will do is reach out to the client to determine how they want to proceed with satisfying the judgment. If the surety company has cash or a letter of credit, the client can instruct them to use the cash or draw on the letter of credit.
The client may also have resources outside of that collateral and want to satisfy it themselves in which case, they will satisfy it, and then come back to the surety with that satisfaction of a judgment. The surety company then will release the collateral back to the client. It is a communication process to understand what the client wants. That’s part of the reason we like to work with certain surety companies, is that they have those professional claims departments because they have that process dialed in and they know how to do that. From there, once that communication, everybody’s on the same page, then they simply proceed with the steps.
In the cases of real estate where maybe the client doesn’t have the assets, their sureties will work with them to see if they can perhaps refinance the property. If they can’t, they might have to foreclose on the property. There are those situations, but it’s more of a dialogue. The surety doesn’t write a check and then start foreclosing on the property. There’s going to be a lot more discussion because it’s in the surety’s interest to try to work with the client to get it resolved as quickly as possible. The client wants to keep their property and figuring out a mutually beneficial way to go about that is what takes place.
Dan, we appreciate your being with us. This is very educational. One thing we like to do with our guests is we offer the opportunity to provide a tip or tell a quick war story as we wind up the episode. Did you have something specific that you’d like to share with our readers?
It ties into the timing element that we’ve touched on which is, years ago we had somebody come to us that wanted to get a supersedeas bond. They wanted to use real estate. There’s already a timeframe involved with real estate. We advised them on those timeframes. There became a lot of back and forth where there were a lot of pauses. We’d go one step and then there’d be a pause, and then another step and a pause. It never came to fruition. The long story short, unfortunately, they got put in a position where the other party was able to pursue the assets and prevent them from using it as collateral. It was an avoidable situation. We don’t see that often but it does happen. That’s worst-case scenario that we’re always trying to avoid. Fortunately the attorney has, by and large, done a great job of encouraging their clients to explore these things and explore them early. It doesn’t happen often, but when it does, it’s always painful to watch because it was something that didn’t have to happen.
Timing is everything.
I was thinking back to our very first episode and Jody described a lot of what we do as appellate lawyers is appellate prevention practice. That part of the process is let’s avoid losing your collateral retention practice. It strikes me when people don’t pay attention to things that they need to. If you’re paying a lawyer to defend you in a lawsuit and you’re facing the prospect of significant judgment, you ought to be thinking ahead to the next step. It’s not limited to an appeal. What happens if you’ve got to provide security for a judgment? You’ve given our readers a lot of great information. Dan, thanks for being with us.
Thank you for Court Surety Bond Agency’s sponsorship of the show. This has been great.
We appreciate it.
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About Daniel Huckabay
CSBA has specialized in providing surety bonds since 1984. Unlike most insurance agencies, we focus solely on surety and don’t offer any other types of products or services. This has enabled us to gain invaluable experience in our niche and build extremely strong relationships with the surety underwriters in the marketplace. Ultimately, this helps us get things done for our clients that others simply can’t.
I started with CSBA in 1996 and worked my way from the ground up. I purchased the company starting in 2003 and became the sole shareholder in 2008.
CSBA was built on being “Customer Focused” meaning we always try to think from the customer’s point of view and get the job done in the best possible way for them. This focus is balanced by being “Integrity Driven”. We always strive to do the right thing whether or not it is the best thing for us.
As the President and the “second generation”, I’ve continued this philosophy while building for the future.
I have been licensed to practice in Texas since 1989, and I am also admitted to practice in Oklahoma. I am admitted to all federal courts in Texas, as well as multiple other federal courts, including the U.S. Court of Appeals for the 5th Circuit and the U.S. Supreme Court.
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