Taxation & Estate Planning

A Co-Maker of a Promissory Note Is Not Always Liable to the Co-Signer [Florida]

By Charles Rubin

In an interesting case, two doctors co-signed a promissory note with others of an LLC where they were members, and that was their employer, payable to a bank. They later left the practice, and the LLC sought to collect from them their share of the liability to the bank. An interesting aspect of suretyship law avoided liability for the doctors.

The doctors were ?accommodation parties? under Florida?s Uniform Commercial Code. Florida Statutes 673.4191(1) provides:

If an instrument is issued for value given for the benefit of a party to the instrument (?accommodated party?) and another party to the instrument (?accommodation party?) signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party ?for accommodation.?

Here, the LLC was the accommodated party, and the doctors were the accommodation parties.

One aspect of the case was whether the doctors were accommodation parties. Under the above statute, they would be accommodation parties only if they are not direct beneficiaries of the value given for the instrument. So were they direct beneficiaries of the loan proceeds? The proceeds were given to the LLC. The use of the funds for salaries, bonuses, and other LLC expenses benefitted them as members/co-owners of the LLC. Nonetheless, their benefits were found to be indirect only and not sufficient to avoid accommodation party status.

So what?s the big deal about accommodation party status? For the accommodation parties (the doctors), it means that they have no liability to the accommodated party (the LLC). Fla.Stats. Section 673.4191(5). They still have liability to the bank because they co-signed the note, but that doesn?t help the LLC any in this case. Incidentally, if the accommodation parties have to pay the bank, they step into the shoes of the bank and can seek collection from the accommodated party.

Erick A. Palma, MD., et al. v. South Florida Pulmonary & Critical Care, LLC, 45 Fla. L. Weekly D2175a

Full post as published by Rubin on Tax on October 31, 2020 (boomark / email).