Appeal bond is a mechanism through which a court stays the execution of the judgment while the matter is on appeal. In a civil law suit, if the Plaintiffs win, they are often allowed to collect money from the defendants as part of the judgment. The defendant usually has the right to an appeal, and is not required to pay the award until the appeal is decided. In such a case, the defendant is required to post an appeal bond to cover the amount of the judgment. From the plaintiff’s perspective, the appeal bond ensures that, if the trial judgment is affirmed on appeal, money will be available to him/her at the conclusion of the appellate process, even if the defendant goes bankrupt or is not in a position to pay the judgment amount. Thus an appeal bond is a guarantee that money would be available to pay the original judgment and cost of the appeal even in the worst scenario like the appeal is unsuccessful.
Unlike many other types of surety bonds, an appeal bond must be collateralized 100 percent. Thus, a defendant/appellant cannot escape their liability by paying a fraction of the bond amount and let the surety finances the remaining amount. In order to avoid the risk of plaintiff not paying the judgment any more, surety companies often require that the defendant/appellant must pay the whole amount in cash and/or other valuable assets. In addition, most states charge an interest in addition to an appeal bond and the amount is often set at 120 percent of the judgment. This requirement also helps in curbing the filing of frivolous appeals. A defendant is required to post an appeal bond within a few weeks of the adverse judgment and if the defendant is a company and lose the case for a huge amount, it could have catastrophic effects on the company as well as its employees. The landmark decision in Pennzoil v. Texaco, in which Pennzoil won a $10.5 billion verdict against Texaco,[i] showcases the adverse effects of an appeal bond.
The Texas appeal-bond rule required that Texaco had to “post the entire amount of the judgment, plus interest, to stay execution of the judgment.” Texaco failed to avoid the appeal bond requirement after several attempts and filed a bankruptcy petition. Texaco was able to obtain a stay of the execution of the judgment by virtue of the automatic stay provisions of the Bankruptcy Code and settled the case. In yet another case, Price v. Philip Morris[ii], which was a class action, Philip Morris was hit with a $10 billion judgment. According to the appeal bond requirement, “Philip Morris would have been required to post $12 billion to stay execution of the judgment pending appeal, but the court reduced that amount by half following severe public scrutiny of the case.”
The general rule for supersedeas or appeal bonds under the Federal Rule of Civil Procedure 62 is that a plaintiff cannot execute on a judgment until 10 days after the judgment has been entered. In order to “stay the execution of a judgment as a matter of right, the defendant must provide a supersedeas bond at or after filing a notice of appeal[iii] and the amount of the bond is the amount of judgment, plus interest and costs.” However, federal rules allow the district court to set a lower bond or to not require one at all, on showing of good cause by the defendant. It is to be noted that some states like Virginia does not give similar discretion to lower courts to reduce the amount of the bond.[iv]
Since 2000, 39 states have reformed their appeal-bond statutes by capping the amount that must be posted. For instance, in Wyoming, “a defendant cannot be required to pay more than $25 million to stay execution of the judgment pending appeal, and businesses with 50 or fewer employees (deemed “small” businesses) cannot be required to pay more than $2 million. Hawaii, passed a similar reform in 2006, but limited the amount small businesses can be required to post to $1 million.”
[i] Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex. App. 1987), cert. denied, 485
U.S. 994 (1988);
[ii] Price v. Philip Morris, Inc., No. 00-L-112, 2003 WL 22597608 (Ill. Cir. Ct. 2003), rev’d, 848 N.E.2d 1 (Ill. 2005), reh’g denied, 846 N.E.2d 597 (Ill. 2006).
[iii] Fed. R. Civ. P. 62(a), (d).
[iv] Tauber v. Commonwealth ex rel. Kilgore, 562 S.E.2d 118 (Va. 2002).)