Cancelling a TRO and Preliminary Injunction Bond

by Joshua Malone

In order to cancel a preliminary injunction or temporary restraining order bond, the Principal needs to submit specific evidence to the Surety. The cancellation evidence needs to demonstrate the court has either made the injunction permanent or discontinued the injunction.

If the court has made an injunction permanent, the Principal and its attorneys should submit cancellation evidence such as a signed court order declaring the bond cancelled and releasing the surety from any and all further liability. By declaring an injunction permanent, the court has agreed with the Principal about the injunction’s validity. Upon receiving such evidence, the surety will release collateral (if any) minus any unpaid due premiums.

However, the court may rule in favor of the Obligee. In this case, the court deems the injunction improper and the Principal will have to pay damages up to the amount of the bond penalty. If the Principal obtained his bond from the surety in exchange for collateral, the Surety may release the collateral to the Obligee. In this case, the Surety needs to also see a signed court order cancelling the bond and directing payment of damages to the Obligee.

Many parties choose to settle preliminary injunctions between themselves rather than have a judge decide. In fact, some Principals obtain TRO and preliminary injunction bonds as a settlement tactic. In essence, the bonds demonstrate to the Obligee that the Principal means business and wants to be taken seriously and negotiate their dispute between closed doors. In these cases, the parties agree to a signed Stipulation of Discontinuance.

The stipulation explains the parties’ differences and usually directs one side to pay the other side’s damages in exchange for ceasing to continue the restrained action. The terms of Stipulations can vary greatly, but attorneys should always try to include language explicitly cancelling the bond and releasing the Surety. Stipulations usually include the signatures of the parties involved, the parties’ attorneys, and sometimes a judge. The sides must file the Stipulation with the court.

To read more about injunction bonds, please see our previous blog post on the topic by clicking here. Have a question about an injunction bond? Contact us to see how we can help.

Injunction Bonds

Injunction Bonds

 

Statutory Accounting Principles (SAP)

by Joshua Malone

Unlike most businesses, insurers use Statutory Accounting Principles (SAP) to prepare their financial statements for state regulatory authorities. State governments in the United States require insurers to use SAP because it stresses liquidity. Insurers must maintain a certain amount of liquidity for several reasons, but most importantly to have the ability to pay claims, losses, and expenses quickly. Most other businesses only have to prepare their financial statements using the rules of Generally Accepted Accounting Principles (GAAP). Insurers must prepare both SAP and GAAP statements to satisfy state regulators and the Securities Exchange Commission.

Unlike SAP, GAAP does not concern itself with liquidity but rather with the business as a going concern, its net worth, and potential future profitability. In other words, SAP helps insureds while GAAP helps investors. The National Association of Insurance Commissioners (NAIC) developed SAP while the Financial Accounting Standards Board (FASB) developed GAAP.

SAP excludes illiquid assets. For example, some of the assets SAP excludes include furniture, prepaid expenses, and balances overdue by 3 months. Therefore, an insurer’s assets will appear smaller on a statement prepared with SAP than with GAAP.

SAP requires insurers to recognize their expenses immediately but not their revenues. For example, insurers must amortize (recognize proportionally over time) their premiums but the not the policy acquisition costs incurred due to acquiring those premiums. Insurers set aside reserves for “unearned premiums” because the insurers may collect a full year premium, but can only earn it monthly during the course of the year. Commercial sureties, however, do not have this issue because they always fully earn the first year premium and insureds cannot obtain a refund if their policy expires within the first year.

Speaking of sureties – many insurers have sureties as subsidiaries. Under SAP, an insurer may not consolidate the financial statements of their subsidiaries with itself (the parent). They must prepare separate financial statements for their subsidiaries using SAP. On the contrary, GAAP allows an insurer to consolidate their subsidiaries’ finances with the insurer’s financial statement.

SAP accounting principles

SAP accounting principles

Offenhartz & Pedersen, LTD. Joins FaceBook, LinkedIn

by Joshua Malone

We’re now on Facebook! Click here to visit our Facebook page and give us a “Like” to receive weekly updates on your News Feed.

Our Facebook page will host more exclusive content not readily available on our website. In addition to weekly blog updates, our Facebook page will also include pictures, trivia, and links to articles concerning the surety business and legal sectors. Our new page will also allow you to catch up with O&P anytime straight from your smartphone and Facebook app.

A fun fact – We choose the New York Supreme Courthouse on Centre Street as the image for our Facebook cover photo due to our office’s close proximity. Some judges require attorneys to file their bonds on the same day, so our location makes it simple and easy for attorneys to pick up the bond and file it. We’re also only a few steps away from the U.S. District Court – Southern District Courthouse. Although many of our clients work in Midtown Manhattan, our convenient location near City Hall has us near Subway stations for the 4,5,6 and A,C trains. Those trains all run to the prime Midtown locations such as Grand Central, Port Authority, 14th Street-Union Square, and Third Avenue.

Facebook offers our company another tool to communicate and interact with our clients and friends. Besides Facebook, our staff also have LinkedIn profiles which you can see on our About Us page. While you’re at it, you may as well connect us with on LinkedIn too! (William, Neil, & Josh).

O&P hopes to build up our online presence to become the #1 source for all things commercial surety, especially bonds for court proceedings like appeal, guardianship, administration, Supersedeas, Receiver, injunction, discharge mechanic lien, Florida and New York game of chance, and QDOT bonds.

Like Us On Facebook!

Like Us On Facebook!

Medicinal Marijuana Compliance Bonds

by Joshua Malone

Medicinal Marijuana Compliance Bonds are a new market for sureties, so not many underwriters or agencies have the knowledge or ability to underwrite them. Our office can get marijuana producers and dispensaries the statutory bonds they need to begin their work.

In some states, emerging medical marijuana producers need to obtain surety bonds guaranteeing their compliance and solvency. For example, the State of Connecticut has recently created a legal framework to regulate their new Medicinal Marijuana producers and dispensaries. Connecticut’s law requires a surety bond have the following characteristics:

  1. The Surety bond must be irrevocable (unchangeable)
  2. The bond must guarantee compliance with the applicable laws (21a-408-29 of the Regulations of Connecticut State Agencies)
  3. The bond must guarantee the creation the production facility within the allotted time frame
  4. The bond must guarantee a continuous and uninterrupted supply of marijuana to dispensaries’ customers
  5. The bond must guarantee immediate payment to the state upon failure to renew the producer’s license IF the Commissioner of Consumer Protection does not otherwise relieve the producer of their obligation to replace the bond

Therefore, a marijuana compliance bond in Connecticut is a type of forfeiture bond because the Surety must pay the full bond penalty in the event of any claims. In Connecticut, the bond penalty equals $2 million. Besides the forfeiture provision, medicinal marijuana compliance bonds prevent many other hazards for sureties to look out for. Most states have only enacted medical marijuana laws within the past decade. The medicinal marijuana industry lacks any kind of loss history or pattern for underwriters to use and try to predict losses.

Further, these states’ laws only allow a handful of producers at any one time (Connecticut wants a minimum of 3 producers but no more than 20). This aspect allows states to scrutinize and focus on producers more easily because only a few producers exist.

Lastly, nearly all medicinal marijuana producers have little to no experience because none legally existed prior to the states’ new laws. Thus, underwriters and sureties cannot rely on “The Three C’s” of underwriting – capacity, capital, and character. Employees and management of these start ups typically lack the experience and sufficient capital to indemnify sureties on top of all the other fees and taxes their industry demands.

Nevertheless, some applicants will meet all these requirements and our agency is here to help during the application process.

Medical Marijuana Compliance Bonds

Medicinal Marijuana Compliance Bonds

Income Statement

by Joshua Malone

Surety underwriters look at an applicant’s income statement to observe profitability over a period of time, usually one fiscal year. The income statement indicates whether a company made a profit by looking at the expenses to generate revenues.

Unlike the previously discussed balance sheet, an income statement shows changes in company finances over a specific period of time. A balance sheet only shows a snap shot of a business’s finances on a given day. Both reveal important financial and accounting information on business’s financial statement prepared by a Certified Public Accountant (CPA).

On an income statement, revenue refers to the sale of products or services, while expenses refer to the costs incurred to to sell those products and services. A common expense on an income statement is the “cost of goods sold.” The cost of goods sold equals the beginning inventory plus any additional inventory minus the ending inventory.

Underwriters use the income statement to find out if a business makes sufficient profits. Income statements create three different values for measuring profit: gross profit, operating income, and net income.

Gross profit simply equals revenues minus expenses. Sometimes accountants express gross profit as a percentage of total sales, which equals the “gross margin.”

Operating income equals gross profit minus general operating expenses. Operating expenses include costs such as advertising, depreciation, and other miscellaneous costs. To count as an operating expense, the business must actually incur that expense within the business’s ordinary operations.

Net income, also known as “the bottom line,” equals operating income plus investment income, minus interest expenses, minus taxes. Underwriters consider a positive net income value as a net profit and an essential to the business’s existence.

Please note – income statements do not record capital expenditures as expenses. Capital expenditures include purchases such as property, real estate, and equipment. When a business purchases real estate or other capital expenditures, they have purchased another asset. Therefore, the balance sheet shows a reduction in one asset, usually cash, and an increase in another asset, such as real estate. Capital investments and expenditures do not count as operating expenditures and therefore do not show up on the income statement for these reasons.

income statement

Income Statement

Tax Bonds

by Joshua Malone

Tax bonds guarantee to the government payment of owed taxes by a business or individual. These bonds come in many different forms and pertain to different sectors of the economy. For example, alcohol bonds guarantee payment of taxes on alcohol sales while income bonds guarantee payment of deferred income taxes. The amount of risk involved on tax bonds varies on the type of tax, the principal’s character and integrity, and the principal’s financial condition.

Underwriters treat tax bonds with strict due diligence because the obligee is the Federal government. Therefore, only “T-Listed” Sureties may underwrite tax bonds. The term “T-Listed” refers to a Surety included on the U.S. Treasury List Circular 570. Sureties included on this list have demonstrated to the government they have strong finances and an honest reputation. All of the Sureties Offenhartz & Pedersen, LTD. works with currently reside on this list (which you can view by clicking here).

Tax bonds present several potential hazards to Sureties. First, underwriters consider these bonds strict financial guarantees. This means a claim on the bond is inevitable, because the government demands its owed taxes. Second, the bond penalty is usually paid in full. Underwriters refer to this provision of a tax bond as a “forfeiture provision,” because the Surety must “forfeit,” hand over unconditionally, the entire amount of the bond. Third, these bonds lack cancellation provisions, which means the Surety cannot cancel unless they provide a 30 days notice of cancellation to both the IRS and the Principal on the bond.

In the case of deferred income tax bonds – Surety underwriters will almost always require full collateral. In many instances, this makes an income tax bond completely unattractive to a Principal. Many principals on these bonds wonder whether its worth paying the premium and ceding the full amount of the owed taxes when they can just pay the tax directly to the IRS anyway. In many cases, a dispute has arisen between the individual and the IRS. Underwriters must have knowledge of any disputes as well as the individual’s finances.

Other tax bonds – such as those guaranteeing payment of “sin taxes” – have less hazards. Underwriters approve these freely for well financed and trustworthy businesses selling tobacco and alcohol.

The Beatles could have used a bond to stop the "Taxman"

The Beatles could have used a bond to stop the “Taxman”

Public Official Bonds

by Joshua Malone

Public Official bonds protect the government and its citizens from the improper actions of a public official. The Federal government, as well as many local and state governments, may require these bonds from their public servants, officials, sheriffs, deputies, and other employees.

Bond forms vary depending on the position, but most government authorities draft their own bond forms to meet the requirements spelled out by the law, ordinance, statute, order, tradition, or office requiring the bond. In most cases, the bond form will explicitly refer to the law itself. In general, the bonds cover any improper actions of a bonded official including mishandling funds, unauthorized compensations, and dishonest acts. Bonds for public officials handling money have more liability and risks than bonds for public officials who do not handle money.

The bonds guarantee the public official’s utmost good faith, or “faithful performance.” This standard acts as a benchmark for the public official’s behavior. Because governments have many different types of public officials, underwriters must use due diligence to study and understand the official’s job, position, and authority.

Sureties can issue these bonds individually or as “blankets.” An individual bond covers only one person and one position. A blanket bond may cover multiple persons and/or positions at once. Underwriters treat each position/person as a separate entity when they issue blanket bonds, and the Surety may extinguish the liability of a position/person under a blanket bond without extinguishing the entire blanket bond. However, governments have different requirements for public official bonds and some do not allow blanket bonds.

Public officials who request a new bond in the middle of their term often raise red flags. Most public officials post their bonds at the beginning of their term, so when a request for a bond comes in the middle of the official’s term it usually means the official has already exhausted the liability of their first bond. Sureties and underwriters must investigate the reasons why the official makes the request and ensure a previous surety has not paid a claim on an official’s previous bond already.

 

 

Open Penalty Bonds

by Joshua Malone

A court or miscellaneous bond sometimes has an open penalty, which simply means a bond penalty does not have a finite limit. Open penalty bonds carry many risks and hazards because the surety does not know the exact amount of liability it must guarantee. A typical bond has a fixed bond penalty, which means the surety limits its liability to an exact amount. However, specific obligations sometimes require an open bond penalty because the value of the guarantee may fluctuate.

Common types of open penalty bonds include appeals, supersedeas, and lost instrument bonds.

Many Federal court supersedeas bonds have open penalties despite typically having a bond amount equal to 111% of the judgment. The extra 11% of the bond amount intends to cover the post judgment interest and costs typical of long term litigation. Post judgment interest accrues yearly but the rate varies between state jurisdictions and Federal court. For example, New York State has a post judgment interest rate of 9% per year while New Jersey only has a 0.5% post judgment interest rate.

Thus, long term and complicated litigation can yield a final judgment greater than the bond amount due to accrued post judgment interest and costs. A surety bond underwriter must carefully evaluate the appellant’s financial ability to pay the judgment plus any additional interest and costs. The underwriter should try not to evaluate the merits of the appellant’s case because underwriters typically do not have law degrees and cannot predict the results of litigation. However, an underwriter should consider the character of the appellant as well as the appellant’s previous litigation history to see if they have many lawsuits and judgments against them.

A lost instrument bond commonly has an open penalty as well. These bonds protect the issuer of stock, tickets, checks, money orders, or currency when the owner misplaces the original document. The bond indemnifies the issuer for faithful honoring and issuing of a replacement document.

Lost instrument bonds involving stocks and securities have open penalties because the value of those documents fluctuate. The bond penalty equals the market value of the replacement document if the original document reappears for transactions.

Cristiano Ronaldo would love an Open Penalty

Cristiano Ronaldo would like an Open Penalty

 

 

More About Qualified Domestic Trusts (QDOTs)

by Joshua Malone

In a previous blog post, I discussed the requirements and characteristics of a Qualified Domestic Trust (QDOT) bond. This post supplements the previous one by including more helpful information.

Alternatives to QDOT bonds include irrevocable letters of credit or having a bank as the US trustee. A surety bond is the best option for an individual trustee because letters of credit can cost a lot of money and limit a trustee’s available credit.These three options only apply to QDOTs worth more than two million dollars.

Additionally, the trustee may deduct up to $600,000.00 worth of real estate from the amount of the bond or letter of credit. The real estate exception only applies to real estate owned by the QDOT, used as the primary residence of the beneficiary, or was passed down to the survivor through the QDOT via the marriage deduction on filed tax returns.

Sometimes the IRS requires a separate surety bond from the Estate of the deceased, or the Trustee, if the QDOT generates some income from shares of an ongoing business. The trustee has the option to pay estate taxes on this income in installment payments. If the Trustee opts for this method of estate tax payments, the IRS requires a bond guaranteeing the payment of those taxes. The IRS evaluates the need for a surety bond in these circumstances on a “case by case” basis.

When the IRS uses individual scrutiny to evaluate the need for a QDOT estate tax installment bond, sureties worry about the risks of “adverse selection.” This term describes a scenario where obligees only require bonds from principals with questionable characteristics, unique situations, or numerous red flags.

Qualified Domestic Trusts (QDOTs) are very complicated affairs. The IRS provides detailed instructions on their website. In order to underwrite these bonds, sureties will require a highly qualified professional to advise the Trustee or trust beneficiary. Approvable professionals include attorneys or Certified Public Accounts because they best understand the complexities of these obligations.

QDOT - Qualified Domestic Trust

Qualified Domestic Trust for a Surviving Spouse

Game of Chance Bonds

by Joshua Malone

Game of Chance bonds are necessary in the states of Florida and New York for the benefit of the states’ contestants participating in a sweepstakes or contest run by a private entity. The bonds guarantee the company’s contest will honor their rules and regulations, including the eventual awarding of prizes to the entitled winners.

The bond amount typically equals the monetary value of the grand prize. Therefore, if the prize is cash, the bond amount usually equals the cash amount. However, if the prize is an item, such as a computer or a car, or a vacation getaway, the bond penalty will equal the cash value of the grand prize.

Game of Chance bonds typically do not renew because most contests last no longer than a year. Contests lasting longer than a year require more thorough underwriting because as an obligation’s duration increases, so does the surety’s risk as more problems may arise and oversight relaxes.

To issue these bonds, underwriters request to see the contest rules and examine them for any unusual provisions. Most contest rules and regulations specify eligible contestants, how to enter, the prizes, how they award the prizes, and the contest’s duration.

If a large, publicly traded corporation requests game of chance bonds, most underwriters will issue the bonds freely. However, underwriters will apply extra scrutiny to contests held by lesser known companies or individuals. The surety must ensure the entity hosting the contest has the capability to pay and award the prizes as specified in the rules and regulations.

Premiums for these bonds equal a small percentage of the bond penalty depending on the riskiness of the obligation.

Attorneys usually contact us for most of the bonds we issue. However, marketers and advertisers contact our office for Game of Chance bonds because they usually handle contests and sweepstakes for their clients.

New York and Florida state provide the necessary bond forms. The contestants must file the bonds with the specific department or agency regulating the gaming or consumer industry.

Game of Chance Bond - McDonald's Monopoly Contest

Game of Chance Bond – McDonald’s Monopoly Contest