Potential Pitfalls in Subsequent Bankruptcies of Reliance on Joint Check Agreements

For those lower tiered subcontractors and suppliers who attempt to bolster their financial security on a construction project when their contracting party runs into financial trouble, a joint check agreement (JCA) may not be the answer. In the Truland case, the courts held that, even though the general contractor issued the check payable jointly to the subcontractor and its supplier under a joint check agreement that required the subcontractor to endorse the check and return it to the general contractor for delivery to, and collection by, the supplier, the process resulted in the transfer of property of the subcontractor for purposes of preference law. The courts were able to reach this conclusion only because the joint check agreement was formally entered into during the preference period after the bulk of the equipment was delivered. Under those circumstances, the courts found the joint check agreement to constitute a preferential transfer of property of the debtor on account of antecedent debt that could itself be avoided. In the courts’ view, because  the joint check agreement was avoidable as a preference, it was not effective to impress a trust on the jointly payable check and its proceeds for the benefit of the supplier.  

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