Is it illegal (fraud?) for a bond company to put up a bond for which they know they cannot be paid?

Factual Questions
1

Suppose Mr. Bloggins has been hit with a hefty fine (let’s say $100,000 or $100k just to keep the amount manageable). They decide to appeal and go to a bond company. Let’s call it Kevin’s Bonds. Kevin’s Bonds has $1B dollars and so can easily cover the bond.

Kevin’s Bonds, for some reason, decides that they’re going to put up the bond even though they know with certainty that Mr. Bloggins cannot cover the bond plus their fee. Now, as I understand it, when filing the court documents there is a requirement to indicate what Bloggins has put up to cover the bond. So let’s say he puts up his car, which is worth $10,000.

Keep in mind, there’s no fraud here between Bloggins and Kevin. Kevin is going into this knowing with certainty that the car is only worth $10k, and will never get another penny from Bloggins. Kevin only represents to the court that the car is worth $10k, i.e. they do not try to pass off the value of the car as being more than it is worth.

  1. Is this legal? In essence, Kevin’s Bond is deciding to pay Bloggins’ fine.
  2. Would a court accept it?
2

Remember that a bond is a surety to appear later, or do whatever later. If Bloggins later fulfils whatever the bond is protecting, the only money that every changes hands is the fee. Which the bondsman has agreed is equal to the value of the car.

Every bond ever written, just like every insurance policy ever written, includes the risk that this deal will go south and the bondsman will be out the value of the bond to the court (or the payoff on the insurance), and then be left holding an empty promise by somebody they either can’t find or who has zero ability to pay that much money. That’s business-as-usual, not fraud.

The bondsman and the insurance company, just like any other bookie, expect to make it up on the volume of good deals net of a few klinkers. No fraud whatsoever.


Now of course what you’re really talking about might involve additional skullduggery where the bondsman knows in advance they won’t even get their fee, or they know in advance that the bondee (the “principal” in the argot) will not fulfill the required terms of the court or whatever. So to the bondsman it becomes a one-way losing bet that amounts to a gift to the principal. And the bondsman knows all that in advance.

I doubt that amounts to fraud, but it certainly makes one want to know where is the quid to go with this pro quo. Those things might be illegal in many ways, including fraud. But are not germane to the bonding itself. Cui bono indeed?

But that’s not FQ.

3

It took me several re-writes to avoid all of these issues. E.g., the first version of the post had it that Kevin was expecting some favor from Bloggins later on or something. But yeah, I wanted to distill this down to its essence of the obligation of the bond company to the court in terms of making sure the bond collateral is sufficient to cover the bond.

Thanks for the response!

4

I don’t think they’d have any obligation to the court. So long as they pay the court if and when it is required, the courts are fine with it.

Now, they would have a fiducial duty to the owners of the bond company, to not deliberately waste their money. If it were a publicly traded company, they’d almost certainly be open to a lawsuit by the shareholders. With a private company, it comes down to what the owners want to do. There’s no law against wasting your own money.

5

Good point. Thanks!

6

For my own amusement, I wish you had called this Barry’s Bonds.

I shall now return to silently following the discussion with interest.

7

Are there tax implications to this? Kevin’s Bonds has just given Mr. Bloggins a sizable gift.

And on whom would the tax burden fall? Isn’t gift tax owed by the giver rather than the receiver?

8

Darn it, I wish I had thought of that. :rofl:

9

That joke really hit it out of the park!

10

But in some circumstances (!) the bond to the court is not “to appear” but a surety to an appeal court that, should the appeal fail, the lower court’s judgement will be satisfied no matter what happens to the Bloggins empire, the amount is within reach of the court.

Essentially the court outsources the whole issue of figuring out the reliability or future possible trajectories of Bloggins Inc. and its owner’s finances to someone else more versed in finances.

I guess if Kevin has a formal loan agreement with B and writes it off when payment fails, then the written off portion might be construed as income for Mr. B. if the loan relates to the operation of his business. This is usually more of an issue when, for example, a loan from employer to an employee is forgiven, that essentially counts as wages. So if Mr. B. is a real estate developer, say, would a loan relating to the operation his real estate business which is subsequently forgiven be considered part of his real estate business income?

I would imagine part of the court filing for the bond would include some filing of the bond agreement, which I hope would include the terms by which it is guaranteed and the terms of (future possible) repayment. Of course, Kevin’s Bonds has to registered and licensed in that state for the court to accept as valid the bond presented.

If subsequently, B fails to pay off the bond as arranged, or Kevin decides not to collect, then things become interesting. I guess it would depend on the IRS whether they decide to go after B for income, or K for a gift, depending on how they view the bond arrangement and the possibility of actual repayment. If B has assets at the time of collection that K does not pursue, that seems like a gift. If B goes bankrupt to avoid repayment, then K declares a business loss and pays less taxes - provided he can persuade the IRS there was a reasonable expectation (based on assets) at the time the bond was made, that K would be repaid in full.

Missing from all these discussions is the question of publicly traded companies. If K is CEO of a company to which other parties have shares but do not participate in running the business, then K has an obligation to those shareholders. He cannot simply give company money to his friends, whether it be a Bentley or a wad of cash or a bond that would never be repaid. The same applies, it seems to me whether one is a CEO of a financial enterprise that loans money, or even (to pick a random example) say you ran a newspaper whose mission was to report news, and instead used company money to suppress news as a favour to a friend. As CEO your first duty to your shareholders is to not waste company money.

Of course, if Kevin owns the business outright, he can do whatever he wants, because as100% of the shareholders, he’s shareholders 100% in agreement with management.

11

If Bloggins gets a $100K bond, pays the $10K fee then skips, does the IRS count that $90K as income for Bloggins?

12

Isn’t the job of bounty hunters to find the people who fail to appear in court and thus forfeit their bond?

13

From an accounting point of view, it would seem as long as the amount is still owed, it is owed, so not income or gift. IANAA - The issue comes down to, I suppose, whether the IRS thinks the debt is being pursued sufficiently vigorously and honestly, or whether it is being purposefully ignored by K -wink, wink, nudge nudge…

14

I’m thinking specific to the OP. Bloggins skips and Kevin’s Bonds immediately writes it off as a bad debt.

15

It sure is. Although their success rate is less than 100% and they too charge something for their services.

In a very rough sense, the bounty hunter is the bondsmans’ moral equivalent of subrogation. IOW … I’m out $X because this risk went south as they sometimes do, but I have a chance to recover at least most of my losses by this alternate procedure. It’s worth a try anyway.

16

Now, I realize that this is far removed from the old west where you could find a guy, shoot him, throw him over a saddle, bring him back to town, and simply hold out your hand. Nevertheless. a situation could arise where the criminal could resist and be killed. If he’s dead, he can’t go to court, so does the bounty hunter still get paid and does the bond company still recover a lot of its lost revenue?

17

Damned good question I’m totally unequipped to answer.

18

I am curious about the whole bail bond system. We don’t have that here in the UK and AFAIK Mr Bloggins would not have to pony up any cash until after he loses the appeal.

If he was considered a flight risk, he may have to surrender his passport and possibly report to a police station daily or weekly, but apart from that he could go about his business as usual.

Of course, if/when he loses his appeal, the cost of the prosecution as well as his defence will fall to him so that’s a major disincentive for frivolous appeals.

19

I’ve had defendant’s die while out on bond. The bail bond company went to court to have bond released.

20

But how does that apply if the defendant is already skipped bail and on the lam, and dies a year later? At a certain point, I believe bail is forfeit. Is there a certain amount remitted when the person is captured?

I suppose the key like everything is “why?”. Writing a debt off when the person could pay (whatever hardship) is a big ddifference from writing it off as “there’s no way they can pay”.

Distinguish between bail bond - a surety that the perp will show up for trial - vs this appeal bond. The appeal bond is a simple mechanism to ensure the person appealing is serious that they think they can win, that they are not trying to put off paying the court’s award temporariy or permanently to their own benefit over the other party’s. Appeals can take years to wind through the courts sometimes. it’s a guarantee to ensure the person required to pay actually does pay. (And I suppose, a way to ensure the person does not use the time to hide assets or move them out of reach of the court.)