Not all costs are created equal
By James C. Martin and David J. de Jesus A version of this article appeared in the Daily Journal on June 9, 2010. Obtaining an appellate bond or depositing cash to stay execution of judgment is not always as simple as it sounds. Depending on the size of the undertaking, an appellant may be forced to borrow money to fund the undertaking or a letter of credit covering the required amount. Such a loan is rarely interest free and the interest can be quite significant, building over the two or three years while an appeal is pending. Court rules and case law establish that the cost of providing security for a judgment on appeal is recoverable if a reversal is obtained. But what fits within the definition of ʺcostʺ? Does it include the interest on money borrowed to pay for the security? The answer, after a recent decision from the 1st District Court of Appeal, is not so clear. First, a little history. For the first half of the 20th century, no statute authorized bond premiums as a recoverable cost, and courts refused to construe the statutory scheme to permit recovery of those premium costs. See Williams v. Atchison Topeka & Santa Fe Ry. Co., 156 Cal. 140, 141 (1909). That changed in 1951 when the Legislature authorized the recovery of bond premiums as a general matter [California Civil Procedure Code Section 1035 (current version at California Civil Procedure Code Section 995.920)] and then authorized recovery of bond premiums as an appellate cost nine years later [California Rule of Court 26(c) (current version at California Rule of Court 8.278)]. See Rossa v. D.L. Falk Constr. Co., 2010 WL 1796771 (Cal. Ct. App. 2010) (explaining history of cost recovery statutes). However, adhering to strict statutory construction principles, courts held that costs associated with letters of credit used to secure the appellate bond remained off‐limits. See, e.g., Geldermann Inc. v. Bruner, 10 Cal. App. 4th 640, 642 (1990). In Geldermann, the successful appellant sought to recover approximately $28,000 he paid to obtain a letter of credit to secure his appellate bond. The Court of Appeal rejected the claim, explaining that ʺonly the costs enumerated in the rule are recoverable, and the list of costs is to be strictly construed.ʺ Because ʺ[a] charge incurred for a letter of credit to secure an appeal bond is not a listed cost,ʺ the court continued, ʺunder the rule of strict construction the charge cannot be considered a ʹpremiumʹ on the bond. In reaching this conclusion, the court also recognized a possible shortcoming in the statute, insofar as it ʺignores the commercial realities of today which may require an expenditure for a letter of credit to serve as securityʺ and that ʺfairness...would compelʺ recovery of such costs. The Legislature responded to these ʺcommercial realitiesʺ in 1994, authorizing the recovery of ʺother expense [s]ʺ needed to obtain a bond, including ʺthe cost of obtaining a letter of credit as collateral[.]ʺ California Rule of Court 8.278(d)(1)(F). The 4th District Court of Appeal in Cooper v. Westbrook Torrey Hills LP, relied on this ʺother expenseʺ language to permit recovery of interest paid to secure a cash deposit in lieu of a bond. 81 Cal. App. 4th 1294, 1298 (2000). There, the appellant borrowed $3 million to finance a $2.5 million undertaking to stay enforcement of an adverse judgment. He deposited $2.5 million of the loan proceeds with the court clerk, and retained the remainder to pay interest on the loan. After obtaining a reversal, the appellant claimed $200,000 in loan interest as a recoverable cost. The trial court held that the rules do not permit recovery of expenses associated with making a cash deposit. The 4th District reversed, reasoning that because the statutory scheme permitted recovery of ʺany ʹother expenseʹ needed to obtain a bond,ʺ and also required courts to treat cash deposits the same as bonds, the appellant was entitled to interest he had paid to obtain the loan. Just last month, however, the 1st District in Rossa v. D.L. Falk Constr. Co., took exception to Cooperʹs reasoning and holding. In Rossa, plaintiffs in a breach of contract action were awarded $100,000 in damages and $680,000 in costs, expert fees, and attorneysʹ fees. 2010 WL 1796771, at 1. To obtain an appellate bond, the defendant had to procure a letter of credit, which in turn required the defendant to deposit $955,000 in an account with the bank issuing the letter. The defendant drew from existing lines of credit to come up with the cash deposit. After obtaining a reversal, and relying on Cooper, the defendant sought recovery of just over $100,000 in ʺinterest expenseʺ ‐ interest paid to acquire the cash needed to secure the letter of credit securing the bond. The 1st District unanimously refused to permit recovery of the interest expense. According to the court, ʺthere are a number of reasons not to extend Cooper to letters of credit‐
indeed, to even question its holding.ʺ Chief among these reasons, the bond and undertaking law permitted recovery only of the bond premium and does not mention ʺany collateral or ancillary expenses incurred in obtaining the bond.ʺ In particular, the statute does not mention recovery for interest paid to acquire an appellate bond and permitted interest on a cash deposit only to the extent there are no proceedings to enforce the liability of the principal on the deposit. Under a strict interpretation of the statutory scheme, therefore, the Court disagreed with Cooper that interest paid to acquire a bond or a cash deposit in lie of a bond was a recoverable cost. The Rossa court also refused to extend Cooper to cover interest paid for letters of credit needed to obtain appellate bonds, emphasizing that strict construction of the cost statutes prevented the court from authorizing the ʺdramatic changeʺ in recoverable costs the defendant (and Cooper) had advocated. In the same vein, the court explained it was ʺnecessary to set limitsʺ on recoverable costs ‐ particularly where, as in the case of letters of credit, the related costs ʺmay be impossible to contain.ʺ For instance, an expansive reading of the cost statutes arguably might permit recovery for the time‐value of labor, overhead, or other ʺintangible and indirect expensesʺ expended to obtain a letter of credit. Significantly, the Rossa court also recognized ʺthere is something like a presumption of proportionality.ʺ In this regard, it noted that the interest defendant paid on the letter of credit was nearly four times the premium on the bond secured by the same letter of credit and comprised 68 percent of the defendantʹs total cost claim. Those proportions reflected an unwarranted expansion of the cost statutes. For these reasons, the court characterized Cooper as a ʺconspicuous exception to the principles that costs are awarded only if statutorily authorized, and that such statutes are strictly construed.ʺ Cooper and Rossa are not necessarily irreconcilable if one limits the cases to their facts. The former permits recovery of interest paid to obtain a cash deposit in lieu of an appellate bond, while the latter prohibits recovery of interest paid to obtain a letter of credit securing an appellate bond. Yet, the underlying rationale of these cases ‐ particularly in how they view the scope of the controlling cost statutes ‐ conflicts sharply. Given the reasoning of both cases, several lessons merge for practitioners. To begin with, if an appellant must borrow money to meet the requirements to stay execution of judgment, it would be prudent to follow the procedure for depositing cash in lieu of a bond. That way, for now at least, the appellant will be entitled under Cooper to recover interest it pays on the loan. By the same token, an appellant should avoid any loan involving a letter of credit, since Rossa likely would prohibit recovery of interest on such a loan. Cooper and Rossa both recognize, in their own ways, that a respondent who loses an appeal and is forced to pay interest on an appellantʹs loan could face exorbitant costs. That provides an incentive to agree to stay execution of judgment, rather than force the appellant to post an appellate bond or cash deposit. Depending on the circumstances, a respondent may wish to avoid incurring additional expenses and attorney fees by simply agreeing to stay execution of judgment pending the appeal. Certainly, an appellant would welcome not having to obtain a loan, bond, or other undertaking while it pursues an appeal. _____________________________________________________________________________________ James C. Martin is a partner in the appellate group of the Pittsburgh and Los Angeles offices office of Reed Smith LLP. David J. de Jesus is counsel in the appellate group in the San Francisco office.