Legal Definitions - accommodation note

An accommodation note is a type of promissory note where one party signs the note to lend their creditworthiness to another party, without receiving any direct benefit from the loan proceeds themselves. The purpose is to enable the second party (the "accommodated party") to obtain a loan or credit that they might not otherwise qualify for on their own. The party who signs to lend their credit is known as the "accommodator" and essentially acts as a guarantor, becoming liable for the debt if the accommodated party fails to pay.

• Example 1 (Business Financing):

  A startup company, InnovateTech, needs a $100,000 loan to purchase new equipment. The bank is hesitant to approve the loan due to InnovateTech's limited operating history and lack of substantial collateral. The CEO's wealthy uncle, Mr. Henderson, agrees to sign the promissory note alongside InnovateTech. Mr. Henderson does not receive any of the loan money or directly benefit from the equipment purchase; his signature primarily serves to assure the bank that if InnovateTech defaults, he will be responsible for repayment.

  Explanation: Mr. Henderson is the accommodator because he signed the note to lend his credit to InnovateTech (the accommodated party) without receiving any direct benefit from the loan proceeds. His signature enables InnovateTech to secure financing it might otherwise be denied.

• Example 2 (Personal Loan/Family Support):

  Sarah, a recent college graduate, wants to buy her first car. She has a steady job but a very short credit history, making it difficult to get approved for a car loan at a favorable interest rate. Sarah's mother, Mrs. Davis, agrees to co-sign the car loan's promissory note. Mrs. Davis will not be driving the car or making payments unless Sarah defaults. Her strong credit score and financial stability provide the necessary assurance to the lender.

  Explanation: Mrs. Davis acts as the accommodator. She signed the note to lend her credit to Sarah (the accommodated party) so Sarah could obtain the car loan. Mrs. Davis does not directly benefit from the car purchase but assumes liability if Sarah fails to make payments.

• Example 3 (Real Estate Development):

  A relatively new real estate developer, Urban Revive LLC, is seeking a construction loan for a small apartment complex. Lenders are cautious about Urban Revive's lack of a long track record with large-scale projects. A well-established and respected construction magnate, Mr. Chen, who believes in Urban Revive's vision, agrees to sign the construction loan's promissory note. Mr. Chen is not an owner or partner in Urban Revive LLC and will not receive any direct profit from the apartment complex's sale. His signature is purely to bolster Urban Revive's creditworthiness in the eyes of the bank.

  Explanation: Mr. Chen is the accommodator. He signed the promissory note to lend his substantial credit and reputation to Urban Revive LLC (the accommodated party), enabling them to secure the necessary construction financing. He does not directly benefit from the loan proceeds or the project itself.