Musings on the Appeals Bond Hearing

Tying up a few loose but all-important ends

This will be relatively brief (I hope). Last couple of weeks have been insane on the news front. Let me set expectations here: I rarely write this often, as there aren’t enough substantive topics in real estate on an average day or week. But of course, the last week or so is a clear exception.

I thought I would engage in some musings on an all-important topic, one that I’ve been really wondering about out loud: Can NAR afford the supersedeas bond?

Let’s wrap up some loose ends around this all-important question. Especially as there have been a flood of new subscribers since the verdict, which means a summary of sorts might be useful.

The Supersedeas Bond

For those who are new here or haven’t been following along, I wrote about this twice now, first in August and then last week. A few people have reached out to point out that Greg Robertson and I went into some depth about this with Ed Zorn on a recent Industry Relations podcast:

It’s towards the end, around the 50:00 mark.

Ed talked about how there will be a hearing before the court on the bond, and that the judge will need to balance the plaintiff’s interests for recovering the judgment she won and the defendant’s interest in having an appeal heard.

As Ed put it:

[The judge wants] to pick a number where the lawyers on the defense are pissed, they have meetings with bankruptcy attorneys the next week, and they eventually decide not to file bankruptcy. That somehow, they can pull through with this amount of money, put some liens on their properties, free up some of their stock assets, get the money without having to file bankruptcy. But wants it to be as high as possible.

The court has full discretion on how much to require for a supersedeas bond. From a surety company (a company that offers these bonds) called Surety Bond Authority:

The bond amount of a Supersedeas Surety Bond is based on state laws and regulations and case situations, which equals the amount of judgment, plus other fees and interest. For instance, in California, the bond amount is 150% of the judgment amount.

Take note that a surety may require less than 100% collateral, whereas the court often mandates 100%. However, in some cases, courts can consider reducing or entirely forgo the full bond requirement. It is because a Supersedeas Bond is often paid in its entirety. If an appellant can demonstrate that it has financial incapacity to pay the judgment (but has made good faith) and failed to post a bond, the court may consider a reduced bond amount as more preferable to having not secured a bond at all.

Additionally, Supersedeas Surety Bonds require full collateral. The collateral may come in the manner of real estate (must have a substantial equity relative to the bond amount), liquid assets (such as cash or liquid investments), or irrevocable letters of credit.

Okay, now that the verdict is out, we know that the jury awarded $1.78 billion in damages, which is automatically trebled to $5.35 billion. That automatic trebling is unusual, but it is a feature of the antitrust laws of the United States.

We know that NAR and the defendants have already asked the judge to reduce the damage amount, and that NAR has publicly said they have enough funds for the appeal bond.

We know further that NAR, KW and BHHS do not have $1.78 billion in assets, never mind $5.35 billion.

We know that NAR has roughly $1 billion in total assets, but only $112 million of that is cash or cash equivalents. $113 million was for real estate and $333 million was in publicly traded securities. That’s $558 million. [These are all from NAR’s 2021 tax filings, so the data is out of date, but it’s what we have.]

We know from 2023 Franchise Disclosure Documents (all publicly available on the interwebz) that KW has $331 million in total assets, but only $47 million in cash, maybe $2 million in real estate, and precious little in what one might call “collateral-worthy” assets:

BHHS has even less:

Because BHHS is a subsidiary of a subsidiary of Berkshire Hathaway, the $52 million in “Accounts and notes receivable—related parties” is basically their cash.

So altogether, maybe BHHS has $100 million or so in cash, real estate, and some receivables?

Let’s say NAR has $500 million, BHHS has $100 million and KW has $50 million that can go towards collateral for a supersedeas bond. That’s $650 million, and that’s assuming all three organizations completely empty the bank account, liquidate everything that can be liquidated, and not even have operating funds.

That is completely unrealistic. For one thing, they have to pay lawyers for the appeal. And pay staff and such in order to be a going concern.

Step One: Damage Reduction

The first step of the analysis is whether Judge Bough would reduce the damage award, as the defendants have asked him to do.

Courts do have the power to set aside jury verdicts and jury damage awards, but it is not often used. And the legal precedent there is more or less set. The idea is that courts can counter the “passion and prejudice” of a jury. From USLegal.com:

The Seventh Amendment to the U.S. Constitution precludes review by any court of a judgment over $20. In light of this provision, courts will not overturn an award made by a jury just because of its large size or because the judge, if he had been standing in their shoes, would have awarded a smaller sum.

However, a judge may reduce the amount of the award if it is far in excess of any rational calculation. Because compensatory damages such as lost wages have formulas by which juries can arrive at an acceptable figure, the reduction of an award is usually applied to punitive damages. The specific ground judges use to justify this action is that the award was made out of “passion and prejudice”.

Given the above, I do not think Judge Bough would reduce the damages for a few reasons:

1. The jury came out during deliberations and asked exactly how the plaintiffs were calculating damages. The plaintiffs calculated damages based on the theory that Missouri sellers would not have paid a buyer agent’s commission if they didn’t have to. There is no “passion and prejudice” here that I can see.

2. The jury’s damage award of $1.78 billion was simply applying the formula of buyer agent commission paid multiplied by the number of covered transactions. With a class of 500,000 sellers, that’s about $8,000 per seller. That is precisely what the law would call “compensatory damages” which will not be reduced.

3. The punitive damages part was not the jury and not the judge. That comes from the actual language of the statute. Judge Bough does not have discretion not to treble damages here. His only discretion is whether to award interest on the actual damages amount.

4. He has consistently gone against NAR and the defendants throughout this case.

So the logical conclusion is that the damage award will not be reduced. It will remain at $5.35 billion.

Step Two: Supersedeas Bond Amount

The more important fight therefore is to have the amount of the supersedeas bond reduced.

The law does permit the judge to reduce the amount of (or forego entirely) the supersedeas bond.

One key here is that a supersedeas bond requires 100% collateral. These are not like bail bonds, where you post 10% of the notional amount. The absolute maximum, which we already established is unrealistic, that NAR, KW and BHHS can post is about $650 million — about a third of the jury’s damage award before trebling.

As Ed Zorn said, the judge will want to push things right to the limit where the defendants have to consider filing bankruptcy but choose not to. Maybe that’s half the absolute maximum, which leaves some cash to do things like pay the lawyers for the appeal — which will not be cheap.

Let’s say Judge Bough comes out with $300 million as the bond amount. The plaintiffs likely have grounds for an immediate appeal but… I imagine the Court of Appeals will not be blind to the need to let NAR, KW and BHHS at least have a hearing in appellate court. Anything more is impractical and just leads to bankruptcy court, and deprives the defendants from their right to be heard on appeal.

So I think it likely that Judge Bough does reduce the amount of the bond to a level that will hurt like hell, but not outright kill the defendants.

Step Three: Who Pays What?

In my August post, I asked questions about how this bond gets divided. Well, now that the real issue is here, it’s time to ask it again.

Who will post how much collateral for this $300 million supersedeas bond? If it is equal shares, neither KW nor BHHS has $100 million in liquid assets. BHHS at least could borrow money from Uncle Warren; can Gary Keller loan KW $100 million or so? Does he want to? Can they borrow the money from a bank? Maybe. Talk about a risky loan though, so the costs would have to be enough to tempt a bank to make an unsecured loan for $100 million.

Could NAR shoulder the entire burden? If the amount is $300 million… maybe. Pledge the real estate, liquidate most of the securities holdings, and NAR goes to near-zero cash, we get very close. But I’m not sure they would be willing to empty the piggy bank like that, especially since Moehrl is around the corner.

That should be a fun (NOT) meeting between the lawyers and the management of all three companies.

My take: NAR ends up paying for the bond, if it’s remotely doable. Why? Because otherwise, KW and BHHS have no choice but to settle. They just don’t have the assets to make a real dent in the collateral for the bond. So they would be forced to settle.

Any settlement will look a lot like the RE/MAX and Anywhere settlements, which means they will have KW and BHHS no longer require REALTOR membership or compliance with NAR’s Code of Ethics. Add the 170K KW agents and the 50K BHHS agents to the 58K from RE/MAX and roughly 200K from all of Anywhere brands and we are at about 480,000 REALTORS who are no longer required to be one by their brokerages and brands. That’s almost a third of all REALTORS today.

I think NAR ends up picking up the tab.

All-Important Hearing

That is, of course, if NAR can pick up the tab. That depends entirely on Judge Bough and the supersedeas bond hearing. As mentioned above, I do think he ends up reducing the amount to make it possible for the defendants to appeal.

I assume that hearing will not happen until after Judge Bough issues the actual decision, including the injunctive relief. The defendants will have 30 days from the entry of final judgment, though that can be extended by the judge. In addition, there are a number of post-trial motions that I am confident the defense attorneys will file (the list can be found here) so a few days may be added.

The appeal bond hearing has to be fairly early on in that timeline so the defendants know exactly how much of a bond they have to post and to have time to find a surety willing to write that bond, negotiate a price, negotiate collateral value, etc. etc.

This hearing will be all-important to the next steps in the journey. Do not jump the gun just yet on anything until we know how these next post-trial hearings go.

-rsh