Free Response to Motion - District Court of Colorado - Colorado

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 1 of 7

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Case No. 03-CV-02504-REB-CBS PETER HORNICK, Plaintiff v. GARY BOYCE AND JOANNE BOYCE, Defendants

PLAINTIFF HORNICK'S RESPONSE TO FORTHWITH RENEWED MOTION FOR STAY OF EXECUTION PENDING APPEAL PURSUANT TO FED.R.CIV.P. 62(D) AND FOR APPROVAL OF SUPERSEDEAS BOND Peter Hornick, by and through his undersigned attorneys, files the following Response to Defendants' Forthwith Renewed Motion for Stay of Execution Pending Appeal and for Approval of Supersedeas Bond.

INTRODUCTION The Boyces are before this Court for a third time to ask for issuance of a stay of execution pursuant to Fed. R. Civ. P. 62(d) on something less than the posting of a full supersedeas bond. The third time is not the charm in this case. As has been exhaustively briefed by the parties in the context of the Boyces' earlier motions for stay, a supersedeas bond in the full amount is a normal condition of a stay. Miami International Realty Co. v. Paynter, 807 F.2d 871, 873 (10th Cir. 1986),

Page 1 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 2 of 7

and see Poplar Grove Planting and Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1191 (5th Cir. 1979) (stating that the burden is on the moving party to demonstrate objectively the reasons for departure from the full bond requirement; the judgment creditor need not initiate contrary proof). The "full amount" includes the whole amount of the judgment remaining unsatisfied, costs on the appeal, interest, and damages for delay. Poplar Grove, 600 F.2d at 1191. Having failed to satisfy either this Court or the Court of Appeals that the property subject to Hornick's judgment lien should be adequate security for issuance of a stay, the Boyces now propose a letter of credit, rather than a full supersedeas bond, as security for a stay. That proposal is insufficient for several reasons: 1) Contrary to the Boyces' assertions as contained in their motion, a letter of credit is not the same thing as cash deposited with the court or a full supersedeas bond. 2) The proposed letter of credit is inadequate security because the issuing bank is insufficiently capitalized to form adequate security. 3) The circumstances surrounding issuance of the proposed letter of credit make clear that the Boyces could post either cash or a full supersedeas bond, and that therefore departure from that requirement is not justified. 4) If a stay were to be conditioned upon the posting of something less than cash or a full supersedeas bond, the judgment lien should remain in place in the event the security is ultimately inadequate. The proposed language of the terms of the letter of credit should be altered to reflect the eventuality of Hornick's prevailing upon his cross-appeal.

Page 2 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 3 of 7

ARGUMENT 1. A letter of credit is not the same thing as cash deposited with the court or a full supersedeas bond. A letter of credit is an undertaking by an issuer to a beneficiary at the request of an applicant to honor a documentary presentation by payment or delivery of an item of value. Colo.Rev.Stat. § 4-5-102(a)(10). It is valid for one year from date of issuance unless it specifies another date of expiration. A letter of credit stating its duration to be perpetual expires five years after its date of issuance. Colo.Rev.Stat. § 4-5-106(2). Manifestly, it is not the same as cash, nor as a supersedeas bond. The cases cited by the Boyces for that proposition in fact do not support such a conclusion. In Secure Engineering Services v. International Technology Corporation, 727 F. Supp. 261, 263 (E.D. Va., 1989), the parties "had discussed the amount and form of the bond. . . the only issue on which the parties disagreed, and the sole issue which the court will address in this opinion, is whether posting of the supersedeas bond would result in the dismissal of the garnishment summons and stay any execution of the judgment initiated prior to the bond's posting." Id. Thus the case examined the issue of the effect of the stay on certain collection proceedings, not the adequacy of a letter of credit. Similarly, In Re Southmark Corporation, 138 B.R. 820 (Bankr. N.D. Tex 1992) did not hold that a letter of credit was the same as a supersedeas bond. That case analyzed whether the pledge of collateral for issuance of a supersedeas bond created a preferential transfer from the bankruptcy debtor. The Court made reference to the similarity in function between a letter of credit and a supersedeas bond to aid in that analysis, as the seminal case in the fifth circuit, which had set the standard for what Page 3 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 4 of 7

constitutes an avoidable transfer, had analyzed a letter of credit. The court drew the parallels between a letter of credit and a supersedeas bond to facilitate that analysis, not to conclude that the two were interchangeable. That a letter of credit is not interchangeable with a cash bond or a full supersedeas bond is referenced in Evolution, Inc. v. Sun Trust Bank, 2005 WL 1041348 (D.Kan., 2005)(not reported in F.Supp.2d), copy attached. There, the Court noted that an irrevocable standby letter of credit was not the same as a supersedeas bond, and because the judgment creditor was unwilling to accept a letter of credit in lieu of a supersedeas bond, and the judgment debtor did not demonstrate good cause, the Court refused to deviate from the standard supersedeas bond requirement. Colorado recognizes the differences between a letter of credit and a full supersedeas bond. The Colorado Rules of Civil Procedure provide that a cash bond, a certificate of deposit, and a corporate surety bond issued by a corporate surety presently authorized to do business in Colorado are automatically effective upon filing. Letters of credit are effective only upon entry of an order approving the bond. Colo. R. Civ. P. 121, Section 1-23(1) and (2).

2) The proposed letter of credit is inadequate security because the issuing bank is insufficiently capitalized to form adequate security. One of the reasons letters of credit and supersedeas bonds are not interchangeable is that the strength of the letter of credit depends upon the strength of the issuer. It is an undertaking by the issuer, and is only so good as the issuer's ability to perform on the undertaking. In this case, the proposed issuer of the letter of credit, Page 4 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 5 of 7

American National Bank, has a total equity capitalization of $125 Million. See the "Statement of Condition" from the bank's web page attached as Exhibit A. The bank is not rated by any rating agency. The proposed letter of credit of $2.5 Million represents 2% of the Bank's total equity capital. At a time when the stability of financial institutions is in doubt due to exposure from lending risks related to housing foreclosures among other things, such a slim capitalization with respect to the Bank's undertaking for the benefit of Hornick does not provide adequate security.

3) The circumstances surrounding issuance of the proposed letter of credit make clear that the Boyces could post either cash or a full supersedeas bond, and that therefore departure from that requirement is not justified In their motion, the Boyces recite that, upon the release of Hornick's judgment liens, the Boyces will be able to deposit $2.5 million in cash as collateral with American National Bank for issuance of the letter of credit. If the $2.5 million in cash can be deposited with the bank, then presumably it can be deposited as a cash bond with the Court, or as security with a corporate surety approved by the Court, in order to obtain the full supersedeas bond required to adequately secure Hornick. Hornick does not dispute that upon the filing of a full supersedeas bond, the judgment liens would be released, because at that point he would be adequately secured.

4) If a stay were to be conditioned upon the posting of something less than cash or a full supersedeas bond, the judgment lien should remain in place. The proposed terms of the letter of credit should be altered to reflect the eventuality of Hornick's prevailing upon his cross-appeal As noted above, a letter of credit depends for its effectiveness upon the financial Page 5 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 6 of 7

soundness of the issuer. Where there is a real possibility that the issuer may be unable to meet its obligations under the letter of credit, Hornick must be able to maintain his secure position if a stay is to enter. For that reason, if the proposed letter of credit is approved, the judgment liens must remain in place to secure Hornick in the event of a default by the bank issuing the letter of credit. Because those judgment liens would be released as a matter of course in the event that either the judgment was reversed or the letter of credit was used to satisfy the judgment, any objection that the Boyces' source for the $2.5 million in cash to secure the letter of credit would have to issuing that cash without removal of the judgment liens is the same objection Hornick has: if the bank defaults on its undertaking, the source (or Hornick) is exposed. If this Court is inclined to approve a letter of credit instead of the standard requirement for a full supersedeas bond, the language proposed by the Boyces must be changed. The proposed language conditions payment of the funds upon a certified mandate by the Tenth Circuit Court of Appeals affirming the judgment in 03-CV-2504. It is possible that the Court of Appeals may not affirm the judgment but rather may grant Hornick his cross-appeal, and remand for entry of judgment in the amount of the original $3.5 million dollar judgment. The language of the letter of credit needs to reflect an obligation to make payment of the amount of the letter of credit in the event of that occurrence, as well.

CONCLUSION Because the law presumes the posting of cash or supersedeas bond in the full amount before a stay will issue, and because Hornick is not adequately secured by a Page 6 of 7

Case 1:03-cv-02504-REB-CBS

Document 187

Filed 08/22/2007

Page 7 of 7

letter of credit issued by an undercapitalized bank, Hornick respectfully requests that the Boyces' Forthwith Renewed Motion for Stay of Execution Pending Appeal be denied. If the Court is inclined to grant the Motion, Hornick requests that the Court leave in place the judgment liens filed by Hornick, and require language in the letter of credit requiring payment under the letter of credit in the event the Court of Appeals affirms the judgment, or finds in favor of Hornick on his Cross-Appeal and directs entry of judgment in an amount greater than that set forth in the judgment.

Respectfully Submitted this 22nd day of August, 2007.

s/ Erich Schwiesow Erich Schwiesow Lester, Sigmond, Rooney & Schwiesow P.O. Box 1270 Alamosa, Colorado 81101 Telephone: (719) 589-6626 FAX (719) 589-5555 Email: [email protected] Attorney for Plaintiff, Peter Hornick CERTIFICATE OF SERVICE I hereby certify that on the 22nd day of August, 2007, I electronically filed the foregoing Plaintiff Hornick's RESPONSE TO FORTHWITH RENEWED MOTION FOR STAY OF EXECUTION PENDING APPEAL AND FOR APPROVAL OF SUPERSEDEAS BOND with the Clerk of the Court using the CM/ECF system which will send notification of such filing to the following e-mail addresses: [email protected] [email protected] [email protected]

s/ Erich Schwiesow

Page 7 of 7