Senator Noreen Evans, Chair

SB 1478 (Harman)

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SENATE JUDICIARY COMMITTEE

Senator Noreen Evans, Chair

2011-2012 Regular Session

Bill No: SB 1478 (Author: Harman)

As IntroducedAmended:

Hearing Date: May 8, 2012

Fiscal: No

Urgency: No

Consultant: RD

SUBJECT

Appeals: Undertaking

DESCRIPTION

Existing law provides that perfecting an appeal does not stay enforcement of the judgment or order, unless the defendant posts an undertaking (appeals bond) for 200 percent of the judgment or order, or 150 percent where the undertaking is given by an admitted surety insurer. This bill would place a cap on appeal bonds at $25 million. Where the party posting the appeal bond is an individual or small business, as defined, on the date of the judgment, the bill would set a cap of $1 million.

BACKGROUND

The Bond and Undertaking Law governs the undertaking procedures for appeals, as well as for most other bonds and undertakings required by law. (Code Civ. Proc. Sec. 995.010 et seq.) Section 917.1 of the Code of Civil Procedure provides that perfecting an appeal does not stay enforcement of a judgment or order directing the payment of money. A defendant against whom a money judgment is entered must provide an undertaking to obtain a stay of enforcement pending appeal, and the amount of an undertaking includes any award against the defendant under Section 998 or under Section 1141.21 of the Code of Civil Procedure. For purposes of the undertaking, costs are also included, but judgments for costs alone do not require a bond be given in order to stay enforcement pending appeal. (See 9 Witkin Cal. Proc. Appeals Secs. 231, 235.)

The purpose of the undertaking is to secure the judgment and appellate costs of the party that already prevailed at trial against the appellant. (SeeCode Civ. Proc. Sec. 917.1(b) which requires that the undertaking is on the condition that if the judgment or order, or any part of it, is affirmed, or if the appeal is dismissed, that the party ordered to pay must pay the amount of the judgment or order, or the part remaining, together with any interest that accrued pending the appeal and costs that may have been awarded against the appellant on appeal.) As such, Section 917.1(b) requires that the bond be for either double the amount of the judgment or order, unless given by an admitted surety insurer, in which case the bond must be for one and one-half times the amount of the judgment or order. Under Section 995.710 of the Code of Civil Procedure, appellants also have the option of making a deposit of money or other negotiable instruments with the trial court in lieu of a bond (on which the appellant would have to pay a premium).

This bill would retain the existing law requirement that the bond be for either 200 percent of the judgment or order, or 150 percent where given by an admitted surety insurer, but cap the bond at $25 million, and would further limit the bond to a cap of $1 million when posted by an individual or small business, as defined.

CHANGES TO EXISTING LAW

Existing law provides that unless an undertaking is given, the perfecting of an appeal shall not stay enforcement of the judgment or order in the trial court if the judgment or order is for any of the following:

• money or the payment of money, whether consisting of a special fund or not, and whether payable by the appellant or another party to the action;
• costs awarded pursuant to Section 998 of the Code of Civil Procedure, that would not have been awarded as costs, as specified; or
• costs awarded pursuant to Section 1141.21 of the Code of Civil Procedure, that would not have been awarded as costs, as specified. (Code Civ. Proc. Sec. 917.1(a).)

Existing law provides that the undertaking must be on the condition that if the judgment or order of any part of it is affirmed, or the appeal is withdrawn or dismissed, the party ordered to pay shall pay the amount of the judgment or order, or the part of it as to which the judgment or order is affirmed, as entered after the receipt of the remittitur, together with any interest that accrued pending the appeal and entry of the remittitur, and costs which may have been awarded against the appellant on appeal, except as specified. Existing law requires that the undertaking be for double the amount of the judgment or order unless given by an admitted surety insurer, in which event it must be for one and half times the judgment or order. (Code Civ. Proc. Sec. 917.1(b).)

Existing lawpermits any party to serve a written offer upon any other party to a trial or arbitration to settle a claim and provides for recovery of specified costs. (Code Civ. Proc. Sec. 998.)

Existing law providesfor the recovery of costs, as specified, when a judgment upon a trial de novo is not more favorable to the requesting party. (Code Civ. Proc. Sec. 1141.21.)

Existing law, in relevant part, provides that, instead of giving a bond, a principal may provide instead of giving a bond, deposit with the officer, among other things:

• lawful money of the United States, maintained by the officer in an interest-bearing trust account;
• bearer bonds or bearer notes of the United States or the State of California; and
• investment certificates or share accounts assigned to the officer, not exceeding the federally insured amount, issued by savings associations authorized to do business in this state and insured by the Federal Deposit Insurance Corporation. (Code Civ. Proc. Sec. 995.710 et seq.)

Existing law defines “small business” as an independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which, together with affiliates, has 100 or fewer employees, and average annual gross receipts of $10 million or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees. (Gov. Code Sec. 14847.1(d)(1).)

Existing law defines “manufacturer” as a business that is:

• primarily engaged in the chemical or mechanical transformation of raw materials or processed substances into new products; and
• is classified between Codes 31-33, inclusive , of the North American Industry Classification System.

This billwould prohibit an undertaking from ever exceeding $25 million and in cases involving an individual or small business, as defined under Government Code Section 14847, would place the cap at $1 million instead.

This bill makes other non-substantive, technical changes.

COMMENT

1. Stated need for the bill

According to the author:

SB 1478 would place a $25 million cap on the amount a defendant must post as bond in order to stay a judgment and pursue an appeal. It also limits the cap to $1 million for small businesses, as defined.

In an era when multi-billion dollar judgments are no longer uncommon, appealing a jury verdict can force an individual or business into bankruptcy. California law requires defendant’s to post 150% (200% if they can’t get a bond) of a verdict to stay a judgment and pursue an appeal. Businesses are forced many times to settle rather than pursue a rightful appeal. When novel legal theories are being pursued against defendants, even entire industries for enormous sums of money, there needs to be a fair chance for the appellate courts to ensure that the process is fair and the law is sound. Appeal bond caps are necessary so that defendants don’t have to go bankrupt merely to pursue an appeal from an adverse trial verdict.

This bill seeks to reduce the financial burden on appeals so that they are available to all defendants—not just those that have the resources to afford them. . . . Currently 38 states have appeal bond reform laws on the books. A majority of these statutes apply only to capping the very large appeal bonds, usually at the $25 million level or higher up to $100 million. However, [Idaho, Kansas, North Carolina, Nebraska, Oklahoma, Texas and Wyoming] have statutes that apply at much lower amounts. . . .”

A coalition of supporters writes that, “[f]or many businesses, the appeal bond requirement serves as a powerful deterrent against appeals even when the court has made a blatant error. For some it can actually force a choice between justice and bankruptcy.. . . Notably, 25 states have legislatively imposed a cap on the size of appeal bonds, fifteen of them setting it at $25 million. SB 1478 would add California to the growing list of states that recognize that appeal bonds can serve as an unreasonable barrier to justice.”

The sponsors, the California Chamber of Commerce and Civil Justice Association of California provide that “[a] litigant’s right to appeal from an adverse judgment is a bedrock principle in our system of justice. The combination of a huge plaintiff’s verdict and the defendant’s inability to post an appeal bond means that the judgment, even if in error, can evade appellate review. An appeal-bond cap that facilitates defendants’ appeals supports the legitimacy and accuracy of the litigation process. . . .”

2. Underlying policy considerations behind appeals bondswould arguably be undermined by the proposed caps of this bill

This bill would limit the amount of an undertaking at $25 million, and in some cases $1 million if involving an individual or small business, as defined. The author points to the decision faced by these defendants in deciding whether to appeal a judgment or order, and points to a New York Times editorial that described a $12 billion bond that Phillip Morris faced from a judge in Illinois as “prohibitively costly.” In that case, the company apparently claimed that it would have to file for bankruptcy if forced to pay the appeal bond.

To allow the stay of enforcement of judgments or orders for money, including where the judgments or orders include costs pursuant to Section 998 or 1141.21 (which exist in part to encourage settlements before trial or to accept reasonable judicial arbitration settlements, respectively) would arguably remove the disincentive against turning down settlement offers or reasonable judicial arbitration settlements to gamble at trial or on appeal. Moreover, the purpose of appeals bonds is not to keep the defendant in business while giving them one more shot to change the court’s mind about the case on appeal; it is to ensure that where a trial has resulted in a judgment against a defendant, the defendant does not avoid or have additional reason to resist paying the judgment to the party who has successfully proven their case against the defendant. As noted by the Consumer Attorneys of California (CAOC), “[a]t a minimum, the appeals process in California takes two years. If appeals bonds are capped at amounts that don’t accurately reflect the judgment, the defendant has the incentive to file an appeal solely for the purpose of delaying payment of a judgment. Additionally, many cases that had not previously settled will settle on appeal. Without the appropriate bond requirement, there is less incentive to settle [outright] and cases that should settle will continue to languish in the system.”

Committee staff also notes that the judgments that are awarded in the billions of dollars, as referenced by proponents of the bill, do not appear to be default judgments. They are judgments or orders that have been fully tried. The defendant/appellant arguably should not be encouraged to delay payment of the judgment or order for money against them by way of lowering the undertaking required for staying enforcements on appeals. It would not be in the interest of public policy to allow appeals to go forth for money judgments without assurance that there is enough money to fulfill the judgment rightfully awarded to the plaintiff/respondent if the judgment is upheld, either in whole or in part. Nor, arguably, is it favorable public policy to provide the defendant/appellant additional incentive to appeal cases in hopes of causing the plaintiff to run out of money and settle the matter for less than the judgment that was entered at the end of trial.

As stated by numerous opponents to this bill, the function of an undertaking is in part to encourage the payment of the judgment or order after the issues have been tried and all post judgment motions have been settled (including a motion for new trial; a motion to vacate a judgment; a motion for judgment notwithstanding the verdict; and a motion to reconsider an appealable order). Where the prevailing party is still forced into an appeal that stays the judgment whilethe case is appealed, public policy supports ensuring that the party’s judgment can be fulfilled, including additional costs awarded on appeal, if he or she prevails again. This Committee may wish to consider whether it is beneficial to deviate from that longstanding policy choice as provided for by this bill.

SHOULD THERE BE A CAP PLACED ON THE APPEAL BOND REQUIRED OFA DEFENDANT WHO WISHES TO STAY THE ENFORCEMENT OF A JUDGMENT OR ORDER FOR MONEY ON APPEAL, AT RISK OF THE DEFENDANT NOT BEING ABLE TO PAY THE PLANTIFF’S FULL JUDGMENT IF THE APPEAL IS DENIED?

3. Opposition concerns

In opposition to this bill, the California Employment Lawyers Association writes:

This bill helps only one kind of party: defendants that have been found by a trial court to be culpable of civil wrongdoing. Whenever a defendant files an appeal of a judgment, a court or jury has found that the defendant’s defenses were without merit. Further, the defendant has had the opportunity—before even filing the appeal to attack the judgment in the trial court. When a losing defendant wants to prevent enforcement of the judgment pending a challenge to the judgment in the trial court, that defendant can move under [Code of Civil Procedure] Section 918 to stay the enforcement of the judgment until ten days after the last day on which notice of appeal can be filed. No undertaking, monetary or otherwise, is required to obtain this state. Most judges, in our experience, automatically grant this stay so that a successful plaintiff cannot enforce a judgment until after the trial court has decided all post-trial motions in the trial court. This existing procedure provides more than adequate protection for defendants that have already been found liable for harm that they have caused. . . .

If there is a so-called “runaway” jury or the factfinder clearly erred, the defendant has had the opportunity to make the appropriate motions in the trial court for a reduction of the damages awarded, a judgment notwithstanding the verdict, or a new trial. At that point, the trial judge deciding those motions will have sat as the governor of the entire case and will have had the opportunity to view the demeanor of the witnesses and determine the truthfulness of their testimony. Only after an adverse finding by the jury and a review by the trial court does the need to appeal even arise.

The Legal Aid Society-Employment Law Center adds, “Some appeals are successful. The huge majority are not. But any appeal, even an unsuccessful one, can delay for years the payment of sums to which prevailing party at trial almost certainly is entitled. The undertaking is what guarantees that the successful plaintiff, who typically will have waited years for trial and now will be waiting years more for the appeal to be decided, will eventually be paid. It also deters defendants from filing frivolous appeals of meritorious judgments. The undertaking, of course, must be substantially greater than the underlying judgment. If it is not, there will be no way to ensure that the plaintiff will be paid all costs that have been awarded and all interest that has accrued on the judgment. SB 1478, therefore, would turn frivolous appeal into a way for unsuccessful defendants to subject prevailing plaintiffs to the risk of losing property that almost certainly belongs to them. In a time of large reductions in court finding and increased stress on the functioning of the entire judicial system, allowing SB 1478 to increase the burden on appellate courts and on the public that supports them is bad public policy.”

Also in opposition to this bill, CAOC writes:

An arbitrary cap on appeals bonds does not accomplish the purpose of the bond: ensuring that successful litigants are protected during the course of an appeal and that funds are available to pay a judgment at the conclusion of an unsuccessful appeal. . . .

The right to a trial by a jury is one of the most, if not the most fundamental right, afforded by our civil justice system. Appellate courts are guided by the presumption that a jury verdict was correct. An appeal is not a new trial, and the Court of Appeal does not have the power to reweigh the evidence or reassess the credibility of witnesses. It is, in fact, quite rare for a Court of Appeal to find that a jury reached the wrong conclusion. This is because once a case reaches the appeal phase, there has been ample opportunity for judges to throw out meritless cases. . . .

Capping appeals bonds means that successful plaintiffs will be potentially left unprotected during the appeals process and may not recover all of the money to which they are entitled.

Support: California Association of Health Facilities; California Citizens Against Lawsuit Abuse; California Chapter of the American Fence Association; California Construction and Industrial Materials Association; California Farm Bureau Federation; California Fence Contractors Association; California Grocers Association; California Independent Grocers Association; California Manufacturers & Technology Association; Chambers of Commerce Alliance of Ventura and Santa Barbara Counties; Engineering Contractors Association; Flasher Barricade Association; Marin Builders Association ; National Federation of Independent Business; Palm Desert Area Chamber of Commerce; Redondo Beach Chamber of Commerce; Santa Clara Chamber of Commerce and CVB; Simi Valley Chamber of Commerce; South Bay Association of Chambers of Commerce