Legal Definitions - accommodation party

An accommodation party is an individual or entity who signs a financial document, known as a negotiable instrument (such as a promissory note or a check), to help another person or business obtain credit or a loan. The accommodation party does this without receiving any direct payment or benefit from the transaction itself. Essentially, they act as a guarantor, lending their creditworthiness to the primary party (called the accommodated party) by promising to pay if the accommodated party fails to do so.

While the accommodation party is responsible for payment to anyone holding the instrument, they are not liable to the accommodated party. The accommodated party remains primarily responsible for the debt and has an implied agreement to reimburse the accommodation party for any payments made on their behalf.

Here are some examples:

• Small Business Loan Co-signer: Imagine a new startup company, "Bright Ideas Inc.," needs a business loan to purchase equipment, but it has a limited credit history. The bank is hesitant to approve the loan without additional security. Mark, a successful entrepreneur and a mentor to Bright Ideas Inc.'s founder, agrees to co-sign the promissory note for the loan.

  In this scenario, Mark is the accommodation party. He signs the promissory note without receiving any of the loan money or direct benefit from the equipment purchase; his sole purpose is to lend his creditworthiness to Bright Ideas Inc. (the accommodated party) so they can secure the financing. If Bright Ideas Inc. defaults on the loan, Mark is legally obligated to repay the bank. However, Bright Ideas Inc. is ultimately responsible for the debt and must reimburse Mark for any payments he makes.

• Student Apartment Lease Guarantor: Sarah, a college student, wants to rent an apartment, but she doesn't have a steady income or a long credit history, which makes the landlord reluctant to approve her lease. Her aunt, Emily, agrees to sign the lease agreement as a guarantor.

  Emily acts as the accommodation party. She doesn't live in the apartment or directly benefit from the rental agreement. She signs the lease to assure the landlord that the rent will be paid, leveraging her own financial stability. If Sarah (the accommodated party) fails to pay rent, Emily is legally responsible to the landlord. Sarah, however, is primarily responsible for the rent and would owe Emily any money she had to pay on Sarah's behalf.

• Corporate Subsidiary Credit Line: "Tech Innovations Corp." establishes a new subsidiary, "Future Gadgets LLC," to develop a specialized product. Future Gadgets LLC needs to open a credit line with a component supplier, "PartsPro," but as a brand new entity, it lacks an established credit rating. Tech Innovations Corp.'s CFO signs a guarantee agreement (a form of negotiable instrument) with PartsPro, promising payment for components supplied to Future Gadgets LLC.

  Tech Innovations Corp. (through its CFO) is the accommodation party. It is not directly receiving the components; Future Gadgets LLC is. Tech Innovations Corp. signs the guarantee to assure PartsPro that payment will be made, leveraging its own strong corporate credit. If Future Gadgets LLC (the accommodated party) fails to pay PartsPro for the components, Tech Innovations Corp. is liable. Future Gadgets LLC, however, is primarily responsible for the debt and must reimburse Tech Innovations Corp. if it has to pay.