This Emerging Topic is an Executive Summary from a lengthy, thoroughly researched law review article, which James Holmes published with the St. Mary’s Law Journal in February 2020.
The Texas civil justice system and business owners badly need further reforms to laws on superseding judgments awarding money. Business owners who cannot remove thousands or millions of dollars from operations for several years especially need these reforms.
Texas law can do better – and should do better – for the vast majority of business litigants that could face a daunting money judgment while needing to pursue an appeal. And, Texas law can protect their interests while still protecting other parties’ interests in civil money judgments.
- Background on Supersedeas Laws, and the Problems.
To prevent the execution of a judgment while a case is on appeal, a defendant – called a judgment debtor – may “supersede the judgment.” If the judgment debtor does not supersede, then the plaintiff – called a judgment creditor – can take the debtor’s cash, inventories, land, and other assets as part of judgment execution, even though the case is on appeal and may be reversed.
The laws addressing how a judgment debtor supersedes a judgment are called supersedeas laws. In 2003, as part of a broad package of civil justice reforms, the Texas Legislature substantially reformed supersedeas laws, making them more favorable to a judgment debtor seeking to prevent judgment execution during an appeal. Currently, Texas law provides that a judgment debtor must provide security at the least of (i) the judgment amount, (ii) $25 million, or (iii) one-half of the debtor’s net worth. Further, Texas law forbids forms of security that cause “substantial economic harm” to a judgment debtor or that interfere with its use of assets “in the normal course of business.”
Despite improvements to Texas supersedeas laws since 2003, many serious problems remain – particularly for small to medium sized businesses, or businesspeople, which need to pursue an appeal, but are unable to deposit the requisite cash or to obtain a supersedeas bond. Business litigants routinely face large Texas judgments that well exceed $25 million or one-half of their net worth. Understandably, they seek to appeal such judgments, which often contain numerous reversible errors. The problem appears most severely for so-called “land rich, cash poor” business litigants – those having substantial real estate holdings such as land, farms, buildings, and oil and gas interests, but having relatively less cash or cash equivalents.
A judgment debtor posts security (whether it be the judgment amount, $25 million, or one-half of the debtor’s net worth) most commonly by way of (i) a cash deposit in lieu of supersedeas bond or (ii) a supersedeas bond. As for the bond, the process for obtaining one will prove to be expensive, tedious, and often prohibitive: first, the judgment debtor must provide sufficient collateral for a letter of credit from a reputable bank, then must pay such bank several points over a prime rate per annum for the letter of credit, then must find a surety company willing to issue a supersedeas bond against the letter of credit, and finally must pay the surety company a substantial per-annum fee for the bond. The process can take several months, even when banks and surety companies are diligently working to complete the transaction.
Also, although banks often take real-estate collateral for purposes of ordinary business transactions, most banks are very resistant to taking real-estate collateral for the unusual transaction of issuing a letter of credit to secure a supersedeas bond. Most banks do not appreciate (or wish even to learn) the risk profile of a civil appeal; consequently, most banks will decline outright a judgment debtor’s request for a letter of credit to support a supersedeas bond.
Further problems confront a judgment debtor attempting to use real-estate assets to supersede a judgment. The judgment creditors (plaintiffs) often obtain judgment liens, such as abstracts of judgment, on the real-estate assets. Judgment debtors, consequently, must litigate in the trial court and in the appellate court whether such liens can be subordinated to the banks’ security interests for purposes of obtaining letters of credit. Or, they must litigate whether such liens can be removed for purposes of a real-estate sale to raise cash.
Finally, the press or media exposure on a large jury verdict and civil judgment will dissuade banks, surety companies, and real-estate buyers from doing any business with a judgment debtor – which, rightly or wrongly, they believe to be controversial or high-profile. A great stigma attaches to a judgment debtor that has lost a trial involving high stakes and high-dollar amounts.
“Trial court discretion” amplifies the foregoing supersedeas problems. Texas supersedeas laws depend far too heavily on “trial court discretion” – which is an appellate court’s strong inclination to allow a trial court, without appellate interference, to help a judgment debtor to supersede a judgment or not to help a judgment debtor. Consequently, to solve the many problems of superseding a judgment, the judgment debtor must convince the trial court, which is the very court that imposed the excessive judgment, to take extraordinary actions to help. Chances are slim the judgment debtor will obtain the trial court’s help. Chances are slimmer an appellate court will rescue the judgment debtor from the trial court’s whims.
- Four Reforms to Address the Problems.
Texas law should turn the largest detriments facing business litigants – namely, (i) sizeable judgment liability and (ii) being land rich and cash poor – into sizeable advantages. Also, Texas law should eliminate a trial court’s “discretion” to help (or not to help) a business litigant needing to supersede a judgment. Four reforms to existing law can accomplish these goals.
First and foremost, Texas law should recognize a judgment liability as a balance-sheet liability for the judgment debtor, which will lessen substantially the required judgment security of one half of net worth. For reasons that conflict with Generally Accepted Account Principles, several Texas intermediate appellate courts have refused to recognize a judgment liability as a balance-sheet liability. The judgment liability can harass and beset the business litigant more so than any other liability on its balance sheet, such as accounts payable or unsecured debts. Yet Texas law ironically does not allow this very dangerous judgment liability to lessen the litigant’s net-worth determination. GAAP accounting does not view a civil judgment liability – especially one on the cusp of enforcement – as improbable, vague, or remote. Therefore, GAAP accounting would put a judgment liability on the judgment debtor’s balance sheet. So should Texas supersedeas laws for purposes of determining the debtor’s net worth.
Second, Texas law should provide a judgment debtor with an absolute right to provide “alternate security” to the more traditional and considerably more expensive options: a bond or a cash deposit in lieu of bond. Alternate security avoids the transactional costs of hastily financing a bond or selling real estate to raise a cash deposit. Avoiding these transactional costs benefits the judgment debtor by preserving its resources for the appeal and for regular business; it benefits also the judgment creditor by preserving assets against which the creditor potentially can collect following the appeal’s conclusion. A Texas business litigant holding substantial real property (e.g., commercial buildings, farmland, or oil and gas interests) should be able to give a deed of trust on that property in favor of the judgment creditor, while still managing the property and collecting earnings from it during the appeal. Or, a Texas business litigant holding substantial personal property (e.g., livestock, farm equipment, common stock, or interests in closely held companies) should be able to give security interests under the Uniform Commercial Code (“U.C.C.”) on that property in favor of the judgment creditor, while retaining the personalty and collecting earnings from it during the appeal. Currently, a judgment debtor can provide alternate security to supersede a judgment only upon obtaining a trial court’s permission, which is discretionary.
Third, Texas law should allow a redetermination of the amount of judgment security the judgment debtor must provide when an intermediate appellate court reduces the liability under the original judgment. Currently, when further review is sought in the Texas Supreme Court or United States Supreme Court, business litigants must experience months or years of further appellate work – while financing supersedeas security for a judgment that has been reversed or reduced.
Fourth, Texas law should allow a judgment debtor to subordinate or remove any judgment-related liens (such as abstracts of judgment) that are pending on the debtor’s real property so that the debtor may use such property for sales (to raise cash for a supersedeas deposit) or as collateral (to support a supersedeas bond). Currently, business litigants can subordinate or remove judgment-related liens only upon obtaining a trial court’s permission, which is discretionary.
By amending Section 52.006 of the Texas Civil Practice and Remedies Code, the Texas Legislature can deliver all four reforms to Texas business litigants needing to supersede a judgment during an appeal.
- Proposed Amendments to Section 52.006, with Summary Explanation.
Below in bold are the proposed amendments. Explanations, when and as necessary, appear in italics with brackets.
Sec. 52.006. AMOUNT OF SECURITY FOR MONEY JUDGMENT. (a) Subject to subsection (c), when a judgment is for money, the amount of security must equal the sum of:
(1) the amount of compensatory damages awarded in the judgment before the appeal or, pursuant to subsection (e)(2), as revised by appellate action before mandate;
(2) interest for the estimated duration of the appeal; and
(3) costs awarded in the judgment before the appeal or, pursuant to subsection (e)(2), as revised by appellate action before mandate.
[“Subjection (b)” has changed to “(c)” in light of the new subsection (b)(1)-(2) below. Also, the phrase “before the appeal or, pursuant to subsection (e)(2), as revised by appellate action before mandate” becomes necessary because subsection (e)(2) below provides the judgment debtor with an absolute right to security-amount redetermination during the appeal and before the appeal’s conclusion, which typically is occasioned by a mandate under Rule of Appellate Procedure 18.]
(b)(1) The judgment debtor has a right to supersede a judgment by means of:
(a) filing with the trial court clerk a written agreement with the judgment creditor for suspending enforcement of the judgment;
(b) filing with the trial court clerk a good and sufficient bond;
(c) making a deposit with the trial court clerk in lieu of a bond; or
(d) providing alternate security in favor of the judgment creditor.
(b)(2)(a) Alternate security may consist of a mortgage, deed of trust, lien, or other instrument creating security interests in the judgment creditor’s favor under Chapters 51 or 64 of the Property Code, or under other applicable law, on the judgment debtor’s real estate holdings to the extent those assets are unencumbered, including land, commercial or residential buildings, rents from real property, oil and gas working interests, oil and gas royalty interests, mineral-ownership rights, and other real estate assets, following a valuation appraisal of the same by a qualified professional.
(b)(2)(b) Alternate security may consist of a security interest in the judgment creditor’s favor under Chapters 1 or 9 of the Business and Commerce Code, or under other applicable law, on the judgment debtor’s personal property to the extent those assets are unencumbered, including livestock, crops, inventories, accounts, instruments, fixtures, equipment, oil and gas production held in storage or in transit, registered or unregistered securities, jewelry, and other personalty, following a valuation appraisal of the same by a qualified professional.
(b)(2)(c) During the appeal, the judgment debtor will continue to manage and use the real estate holdings and personalty that is being used as alternate security. The judgment debtor will receive any earnings from the real estate holdings and personalty that is being used as alternate security.
(b)(2)(d) The judgment debtor has a right to elect to use as many or as few security interests as it chooses, in whichever form it chooses, in order to supersede a judgment by using alternate security.
[Rule of Appellate Procedure 24.1(a) contains the four means by which the judgment debtor can supersede a judgment: agreement, bond, cash deposit, and alternate security. This amendment lists the first three means verbatim from the procedural rule, but revises the listing of alternate security and defines it so as to provide the judgment debtor with an absolute right to alternate security – not dependent on a trial court’s discretion. The smaller business defendant in Texas likely will have substantial real estate holdings or personal property with which it can supersede a judgment by means of a deed of trust, lien, or other security interest in the judgment creditor’s favor; and, such “alternate security” is often preferable to either a bond or cash deposit. The business defendant can continue to operate, and receive earnings from, the realty and personalty during the appeal. As owner of the real and personal property, the business litigant ought to have the right to choose the numerosity and the kinds of security interests that it will use in order to supersede a judgment, without interference from a judgment creditor, another litigant, or the trial court utilizing its discretion over the matter.]
(c)(1) Notwithstanding any other law or rule of court, when a judgment is for money, the amount of security must not exceed the lesser of:
(a) 50 percent of the judgment debtor’s net worth; or
(b) $25 million.
(c)(2) When a judgment is for money, the judgment amount must be deemed an accounting liability for purposes of determining the judgment debtor’s net worth under the formula of net worth equals total assets less total liabilities, even if the judgment debtor’s net worth becomes zero or a negative value.
[This is a renumbering and renaming to “(c)” to make room for the new subsection (b). Also, abiding by GAAP accounting, subsection (c)(2) provides that a civil judgment liability constitutes an actual liability for purposes of calculating net worth, even when the net-worth formula produces zero or a negative number by including the judgment as a liability.]
(d) On a showing by the judgment debtor that the judgment debtor is likely to suffer substantial economic harm if required to post security in an amount required under subsection (a) or (c), the trial court shall lower the amount of the security to an amount that will not cause the judgment debtor substantial economic harm.
[This renaming to “(d)” makes room for the new subsection (b).]
(e)(1) An appellate court may review the amount of security as allowed under Rule 24, Texas Rules of Appellate Procedure, except that when a judgment is for money, the appellate court may not modify the amount of security to exceed the amount allowed under this section.
(e)(2) When a judgment is for money, following any intermediate court’s decision or action that lowers the judgment amount that the trial court used to set security, the judgment debtor has a right when further review is sought in the Texas Supreme Court or the United States Supreme Court to a redetermination of the amount of security required to supersede the judgment under this section or under Rule 24, regardless of whether the appellate court issues a mandate and whether the appellate proceedings are completed.
[This is a renumbering and renaming to “(e)” to make room for the new subsection (b). Presently, a judgment debtor must supersede a judgment as it existed before any appellate court’s decision or action reducing the judgment – until the appellate court issues a mandate to the trial court under Rule of Appellate Procedure 18 or the entire appeal has concluded. Subsection (e)(2) enables a judgment debtor to seek a redetermination of the security amount in light of a reduction on appeal – which may be continuing – without having to wait months or years for the mandate or appellate conclusion.]
(f) Nothing in this section prevents a trial court from enjoining the judgment debtor from dissipating or transferring assets to avoid satisfaction of the judgment, but the trial court may not make any order that interferes with the judgment debtor’s use, transfer, conveyance, or dissipation of assets in the normal course of business.
[This renaming to “(f)” to make room for the new subsection (b).]
(g) When a judgment is for money, the judgment debtor has a right to the subordination of, or the removal of, any judgment liens filed under Property Code chapter 52 or other applicable law, in the event the judgment debtor seeks to use real estate holdings to supersede the judgment, whether in a sales transaction to raise a cash deposit, as collateral for a bond, or otherwise.
[Subsection (g) gives a judgment debtor seeking to supersede a judgment an absolute right to use real estate holdings in a sale to raise cash proceeds, or as collateral for a supersedeas bond, despite pending judgment liens, such as abstracts of judgment. The judgment debtor would not have to ask a trial court to use its discretion to lift, subordinate, or release the liens.]
Below are the proposed amendments without highlighting or explanations.
Sec. 52.006. AMOUNT OF SECURITY FOR MONEY JUDGMENT. (a) Subject to subsection (c), when a judgment is for money, the amount of security must equal the sum of:
(1) the amount of compensatory damages awarded in the judgment before the appeal or, pursuant to subsection (e)(2), as revised by appellate action before mandate;
(2) interest for the estimated duration of the appeal; and
(3) costs awarded in the judgment before the appeal or, pursuant to subsection (e)(2), as revised by appellate action before mandate.
(b)(1) The judgment debtor has a right to supersede a judgment by means of:
(a) filing with the trial court clerk a written agreement with the judgment creditor for suspending enforcement of the judgment;
(b) filing with the trial court clerk a good and sufficient bond;
(c) making a deposit with the trial court clerk in lieu of a bond; or
(d) providing alternate security in favor of the judgment creditor.
(b)(2)(a) Alternate security may consist of a mortgage, deed of trust, lien, or other instrument creating security interests in the judgment creditor’s favor under Chapters 51 or 64 of the Property Code, or under other applicable law, on the judgment debtor’s real estate holdings to the extent those assets are unencumbered, including land, commercial or residential buildings, rents from real property, oil and gas working interests, oil and gas royalty interests, mineral-ownership rights, and other real estate assets, following a valuation appraisal of the same by a qualified professional.
(b)(2)(b) Alternate security may consist of a security interest in the judgment creditor’s favor under Chapters 1 or 9 of the Business and Commerce Code, or under other applicable law, on the judgment debtor’s personal property to the extent those assets are unencumbered, including livestock, crops, inventories, accounts, instruments, fixtures, equipment, oil and gas production held in storage or in transit, registered or unregistered securities, jewelry, and other personalty, following a valuation appraisal of the same by a qualified professional.
(b)(2)(c) During the appeal, the judgment debtor will continue to manage and use the real estate holdings and personalty that is being used as alternate security. The judgment debtor will receive any earnings from the real estate holdings and personalty that is being used as alternate security.
(b)(2)(d) The judgment debtor has a right to elect to use as many or as few security interests as it chooses, in whichever form it chooses, in order to supersede a judgment by using alternate security.
(c)(1) Notwithstanding any other law or rule of court, when a judgment is for money, the amount of security must not exceed the lesser of:
(a) 50 percent of the judgment debtor’s net worth; or
(b) $25 million.
(c)(2) When a judgment is for money, the judgment amount must be deemed an accounting liability for purposes of determining the judgment debtor’s net worth under the formula of net worth equals total assets less total liabilities, even if the judgment debtor’s net worth becomes zero or a negative value.
(d) On a showing by the judgment debtor that the judgment debtor is likely to suffer substantial economic harm if required to post security in an amount required under subsection (a) or (c), the trial court shall lower the amount of the security to an amount that will not cause the judgment debtor substantial economic harm.
(e)(1) An appellate court may review the amount of security as allowed under Rule 24, Texas Rules of Appellate Procedure, except that when a judgment is for money, the appellate court may not modify the amount of security to exceed the amount allowed under this section.
(e)(2) When a judgment is for money, following any intermediate appellate court’s decision or action that lowers the judgment amount that the trial court used to set security, the judgment debtor has a right when further review is sought in the Texas Supreme Court or the United States Supreme Court to a redetermination of the amount of security required to supersede the judgment under this section or under Rule 24, regardless of whether the appellate court issues a mandate and whether the appellate proceedings are completed.
(f) Nothing in this section prevents a trial court from enjoining the judgment debtor from dissipating or transferring assets to avoid satisfaction of the judgment, but the trial court may not make any order that interferes with the judgment debtor’s use, transfer, conveyance, or dissipation of assets in the normal course of business.
(g) When a judgment is for money, the judgment debtor has a right to the subordination of, or the removal of, any judgment liens filed under Chapter 52, Property Code or other applicable law, in the event the judgment debtor seeks to use real estate holdings to supersede the judgment, whether in a sales transaction to raise a cash deposit, as collateral for a bond, or otherwise.