Suppose a jury has found a company liable for $10 million in compensatory damages and $100 million in punitive damages in a products liability suit. The company's attorneys believe it has an excellent chance to prevail on appeal on the issue of liability, and an even better chance to get the punitive damages thrown out altogether or at least substantially remitted.
But, to stay the judgment and protect its assets while the appeal is pending, the company must deposit with the court a supersedeas bond of such extraordinary size that its ability to obtain the bond at all is in question, and, in any event, the bond premium would be a severe strain on its resources. The bond must cover not only the $110 million in damages, but also a hefty additional amount, set by statute, which is intended to cover the interest that will accrue during the appeal1
In an era of large damage awards, in which punitive damages often are many times higher than compensatory damages2, the traditional requirement that bonds cover the total damages award may no longer be realistic or defensible. Company attorneys faced with such a bonding requirement may believe it futile to urge courts to limit the bond amount to that of the compensatory damages plus costs and the interest likely to accrue during the appeal, with no need to bond the punitive damages. Recent case law suggests, however, that courts may be increasingly receptive to such an approach.
Compensatory damages and punitive damages have different purposes. Compensatories are designed to return to a plaintiff that which has been lost; they are the plaintiff's by right. Requiring a bond to guarantee their payment if the defendant's appeal is unsuccessful secures the plaintiff against an actual loss.
The purpose of punitive damages, in contrast, is not compensation of the plaintiff but "punishment of the defendant and deterrence."3 Punitive damages are in effect a debt owed to society.4Far from being the plaintiff's by right--they are not compensation for injury5--they fall into the plaintiff's lap as a windfall.6
More Harm Than Good?
There is thus a strong argument that the plaintiff's merely incidental interest in punitive damages should not be protected automatically by bonding. The policy underlying supersedeas bonds--protection of prevailing plaintiffs from loss due to stays of execution pending appeal7--does not require it. Rather, courts should give effect to that policy by determining whether, on balance, such bonding may do more harm than good.
At least one state court has done exactly that. In Polar Equipment Inc. v. Brunswick Corp.,8 an Alaska court refused to order bonding of the punitive portion of a damages award so long as the appellant maintained a net worth of 10 times the unbonded amount of the judgment. Company attorneys should consider asking courts in their own jurisdictions to adopt a similarly flexible approach, if state statutes and court rules leave this option open.
Supersedeas bonds have been a fixture of American appellate practice since colonial times,9 but requirements have varied considerably among jurisdictions. For example, although many of the colonies required a bond equal to double the amount of the damages award, a Virginia act of 1659 required security only for "half the value of the debt,"10 and a New Jersey law of 1664 established a set amount of 100 pounds when prosecuting an appeal to the Privy Council.11 After the Revolution, New Jersey enacted a requirement for a bond in non-contract appeals "in such reasonable sum as the court . . . might fix."12
More recently, Judge Richard Posner has suggested that a federal court may limit the required amount of the appeal bond to compensatory damages, on the ground that punitives are a windfall to a plaintiff and, as such, ought not receive elevated protection over claims of other creditors pending resolution of an appeal.13
Federal courts long have recognized that the amount of supersedeas bonds is discretionary with the court and have developed a variety of means to reduce, substitute for or dispense with them.14 Former Rule of Civil Procedure 73(d) explicitly recognized the power of a district court to fix a bond amount less than the full amount of damages. Today Rule 62(d) and Appellate Rule 8 generally are interpreted to maintain that discretionary power.15
The 7th U.S. Circuit Court of Appeals, in Dillon v. City of Chicago,16 has offered five factors federal courts should consider in deciding whether to waive or modify the bond: the complexity of the collection process; the amount of time required to collect on a judgment after it is affirmed on appeal; the degree of confidence that the court has in the availability of funds to pay the judgment; whether the defendant's ability to pay the judgment is so plain that the cost of a bond would be a waste of money; and whether the defendant is in such a precarious financial situation that the requirement to post a bond would place other creditors of the defendant in an insecure position.17 This test can be quite useful, because it offers plenty of hooks on which to hang an argument for a reduced bond that does not cover punitive damages.
Federal courts periodically have decried excessive appeal-bond requirements. The 2d Circuit, in Texaco Inc. v. Pennzoil Co.,18 noted that inflexibly requiring a bond in the full amount of a huge judgment can be "irrational, unnecessary, and self-defeating, amounting to a confiscation of the judgment debtor's property without due process."19
A majority of the U.S. Supreme Court, reversing on abstention grounds, did not question that conclusion.20 Likewise, the 10th Circuit has recognized the absurdity of requiring a bond in the full amount of damages where doing so would likely drive the appellant into insolvency.21
At least one commentator agrees that inflexibly requiring an appellant to post a supersedeas bond without judicial discretion to examine the facts and provide for alternate forms of security "denies an appellant's due process right to an effective appeal."22
Some state statutes or court rules grant courts discretion to set a bond amount lower than the total judgment. For example, Georgia and Maryland allow the court to reduce the bond "for good cause shown";23 Delaware allows the court to determine "the sufficiency of security";24 and Texas allows the court, in certain types of actions, to reduce the bond where the full amount of judgment would cause "irreparable harm" to the appellant.25
Many state courts have recognized that a reduced bond may be appropriate. The Supreme Court of Hawaii, for example, has held that the amount of a supersedeas bond is discretionary with the trial court, must be based "with reasonable certainty" on the appellee's possible loss, and may not be used to discourage appeals.26 Even if a state statute or court rule appears to grant no discretion, courts nevertheless may be receptive to equitable arguments. For example, insurers standing in the shoes of unsuccessful defendants frequently have not been required to post an amount above the limits of their liability.27
The possibility of appellants going bankrupt should not weigh against limiting bonds to compensatory damages. Even if appellants file for bankruptcy, successful appellees still will be able to execute against the posted bonds and collect their compensatory damages.
It is not uncommon for courts to completely deny punitive damages claims in bankruptcy reorganizations.28 As one court put it, "the equitable powers of the bankruptcy court enable us to eliminate, subordinate, or limit punitive damages."29
The windfall nature of punitive awards supports this "equitable subordination." There is no good reason why the beneficiary of such a windfall should be elevated above a defendant's other creditors by requiring the defendant to post an appeal bond--a bond that has to be purchased, moreover, at no small cost, so as to further deplete the amount available for distribution to the creditors.
Unbonded appellees with punitive damages claims against debtor-appellants will not have their claims eliminated, but will remain unsecured creditors for the amount of the punitive damages--no worse off than the appellants' other unsecured creditors. There seems no justification to put them in a better position, for to do so, as the Supreme Court put it in striking down a state's double- bonding requirement for evicted tenant appellants, would "bear no reasonable relationship to any valid state objective."30
Thus, when faced with a judgment imposing substantial punitive damages, attorneys should consider submitting creative proposals to ameliorate the onerousness of a bond in the full amount of judgment. Even if a court is not willing to dispense with bonding for punitive damages altogether, it may be open to suggestions for alternatives to full bonding. The effects of having to pay a bond equivalent to a sizable percentage of a company's net worth could well be devastating to its shareholders, employees, customers and suppliers, and a court may be receptive to proposals for minimizing the casualties.
For example, the court can monitor a company with sufficient assets to protect against waste.31 Where a bond would be "an undue financial burden," the court can impose restraints on the appellant's financial dealings so as to protect the appellee.32 Securities may be placed in escrow, in addition to monitoring and protective devices.33 If the appellant has unencumbered assets, liens may be offered as a substitute for a cash bond. One court even allowed the appellants to post their reserved home equity line of credit in lieu of posting a bond.34
The range of possibilities is extensive, limited only by the particular situations of contending parties and the alertness and inventiveness of their attorneys. Courts that show an openness to such possibilities will create incentives for plaintiffs' attorneys to negotiate court-approved agreements instead of "death sentence" bonds.
The holding in Polar Equipment and Judge Posner's comments in Olympia Equipment offer sufficient precedent for a good faith argument that punitive damages need not be bonded to stay execution pending appeal, provided state authority is not to the contrary. Attorneys should not hesitate to prosecute such an argument to save defendants from the burden of buying a bond to protect a windfall element of the judgment and even, in some cases, from financial ruin.
1. See, e.g., Rule 29 of the Federal District Court for the Northern District of New York (requiring a supersedeas bond of 11 percent above the challenged damages).TXO Prod. Corp v. Alliance Resources Corp.
2See, e.g., TXO Prod. Corp v. Alliance Resources Corp., 113 S. Ct. 2711 (1993) (affirming judgment of $19,000 in compensatory damages and $10 million in punitives).
34 Restatement of the Law Second, Torts §908 (comment b). See also W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser & Keeton on the Law of Torts §2, at 9 (5th ed. 1984); Memphis Community Sch. Dist. v. Stachura, 477 U.S. 299, 306 n.9 (1986) ("The purpose of punitive damages is to punish the defendant for his willful or malicious conduct and to deter others from similar behavior").
4See Smith v. Wade, 461 U.S. 30, 59 (1983) (Rehnquist, J., dissenting) (punitive damages "should go to the State, not to the plaintiff").
5Int’l Bhd. of Elec. Workers v. Foust, 442 U.S. 42, 48 (1979) (punitive damages are not compensation for loss but instead "`are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence'") (quoting Gertz v. Robert Welch Inc., 418 U.S. 323, 350 (1974)).
6See Smith, 461 U.S., at 59 ("Punitive damages are generally seen as a windfall to plaintiffs"); Olympia Equip. Leasing Co. v. Western Union Tel. Co., 786 F.2d 794, 797 (7th Cir. 1986)(the punitive part of damages award is a "windfall" to the plaintiff)
7See Poplar Grove Planting & Refining Co. v. Bache Halsey Stuart Inc., 500 F.2d 1189, 1190-91 (5th Cir. 1979)..
8. No. 3AN-87-3826 CI (Alaska Sup. Ct. April 23, 1992).
9. See Roscoe Pound, Appellate Procedure in Civil Cases 95-99 (Little, Brown and Co., 1941)
10Id., at 95.
11. Id., at 97.
12. Id., at 98.
13. Olympia Equip., 786 F.2d at 797. One federal court ruled exactly the opposite, requiring a bond for the punitive damages but not the compensatory damages. Weekley v. Transcraft Inc., 121 F.R.D. 399, 399-400 (N.D. Ind. 1988). In that case, however, the compensatory damages were almost four times the amount of the punitives, and the liability of the defendant's insurer to cover the punitive damages was in question.
14. See, e.g., Townsend v. Holman Consulting Corp., 914 F.2d 1136, 1145 (9th Cir. 1990) (district court may grant stay with pledge of security other than bond); Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 281 (7th Cir. 1986) (district court has discretion to waive $2 million appeal bond); Miami Internat'l Realty Co. v. Paynter, 807 F.2d 871, 873-74 (10th Cir. 1986) (upholding district court's setting bond at 25 percent of damages award); Texaco Inc. v. Pennzoil Co., 784 F.2d 1133, 1152-55 1152 (2d Cir. 1986) (upholding reduction of $12 billion state bond requirement to $1 million), rev'd on other grounds, 481 U.S. 1 (1987); Federal Prescription Serv., Inc. v. American Pharmaceutical Ass'n, 636 F.2d 755, 761 (D.C. Cir. 1980) (no bond required where defendant's net worth was 47 times the amount of damage award); Poplar Grove Planting and Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1191 (5th Cir. 1979) (court has discretion to substitute form of guaranty other than bond); C. Albert Sauter Co. v. Richard S. Sauter Co., 368 F. Supp. 501, 520-21 (E.D. Pa. 1973) (allowing defendant to place securities in escrow instead of filing irreparably injurious bond of $1.2 million); Trans World Airlines, Inc. v. Hughes, 314 F. Supp. 94, 98 (S.D.N.Y. 1970) (allowing defendant to post bond of less than half the amount of $161 million judgment).
15See James W. Moore et al., 9 Moore's Federal Practice Sec. 208.06 (2d ed. 1993).
16866 F.2d 902, 904-05 (7th Cir. 1989).
17Id., at 904-05 (finding no need for city to post bond); see also In re Oil Spill by the "Amoco Cadiz" off the Coast of France on March 16, 1972, 744 F. Supp. 848, 849-50 (N.D. Ill. 1990) (utilizing the Seventh Circuit test to relieve two of three defendants from bond requirement); but see Feldman v. Philadelphia Housing Auth., No. 91-5861, 1994 WL 46514 (E.D. Pa. Feb. 16, 1994) (utilizing 7th Circuit test to deny requested relief from bond requirement).
18784 F.2d 1133 (2d Cir. 1986), rev'd on other grounds, 481 U.S. 1 (1987).
19Id. at 1154.
20481 U.S. 1 (1987).
21Miami Int'l Realty, 807 F.2d at 874.
22E. Carlson, "Mandatory Supersedeas Bond Requirements--A Denial of Due Process Rights?," 39 Baylor L. Rev. 29, 39 (1987). For a different conclusion, see D. Laycock, "The Remedies Issues: Compensatory Damages, Specific Performance, Punitive Damages, Supersedeas Bonds, and Abstention," 9 Rev. Litig. 473 (1990).
23Ga. St. 5-6-46(a) (1994); Md. R. Proc. 1-402(d) (1995).
24Sup. Ct. R. 32(c) (1992).
25Tex. Civ. Prac. & Rem. Sec. 52.002 (1993).
26Midkiff v. de Bisschop, 574 P.2d 128, 131 (Hawaii 1978).
27See, e.g., Todd v. Kelly, 837 P.2d 381, 391 (Kan. 1992); Cansler v. Harrington, 643 P.2d 110, 114 (Kan. 1982); Merritt v. J.A. Stafford Co., 68 Cal. Rptr. 447, 451 (Cal. 1968) (in bank); Rosato v. Penton, 442 A.2d 656, 657 (N.J. Sup. Ct. 1981); Fitzgerald v. Addison, 287 So.2d 151, 153 (Fla. Dist. Ct. App. 1973).
28E.g., In re Apex Oil Co., 118 B.R. 683, 697 (Bankr. E.D. Mo. 1990) (excluding punitive damage claims from reorganization plan).
29In re Allegheny Int’l Inc., 106 B.R. 75, 79 (Bankr. W.D. Pa. 1989)
30Lindsey v. Normet, 405 U.S. 56, 76-77 (1972).
31See Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 281 (7th Cir. 1986) (court can, in lieu of bond, require appellant to provide periodic reports to facilitate monitoring); Poplar Grove, 600 F.2d at 1191 (presentation of a financially secure plan for maintaining high degree of solvency is adequate substitute for bond).
32Poplar Grove, 600 F.2d at 1191.
33Sauter, 368 F. Supp., at 520-21.
34See In re Kelly, 841 F.2d 908, 910 (9th Cir. 1988).
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