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In a recent bankruptcy decision, a joint check agreement did not protect the supplier from a preference claim by a bankruptcy trustee. In this case, an electrical subcontractor was late in paying sums due to its supplier. The supplier notified the electrical subcontractor and the general contractor (“GC”) that it would cease delivering equipment until payments resume. The GC, the subcontractor, and the supplier entered into a joint check agreement. In anticipation of the joint check agreement, the supplier released $1.8 million worth of equipment on May 27, 2014. The joint check agreement was signed on June 16, 2014. On July 11, 2014, the GC delivered a check made payable jointly to the electrical subcontractor in the amount of $2.1 million. The subcontractor endorsed the check and returned the check to the GC who, then, forwarded it to the supplier.

The electrical subcontractor filed bankruptcy on July 23, 2014. The trustee in the bankruptcy proceeding sued the supplier to recover the $2.1 million payment to the supplier as a preference. A preference claim is when a Bankruptcy Trustee seeks to recapture a payment from a debtor to a creditor that occurred within 90 days before the bankruptcy petition was filed. The concept is that the creditor who received payment was preferred over other unsecured creditors. While recognizing prior court precedent that a joint check agreement created a constructive trust in favor of the supplier, the court ultimately found that the joint check agreement itself was preferential and could be avoided. As noted above, the supplier released $1.8 million, of materials, on May 27, 2014. This created a debt. The joint check agreement was not signed until June 16, 2014. Since the joint check agreement occurred after the materials were supplied, this transfer was for, or on account of, antecedent debt. The court found it to be avoidable by the trustee in the electrical subcontractor’s bankruptcy case and entered judgement against the supplier in the amount of $2.1 million.

See Gold v. Myers Controlled Power (In Re Truland Grp., Inc.), 588 B.R. 447 (Bankr. E.D. Va. 2018) affirmed by the United States District Court for the Eastern District of Virginia, Alexandria Division.

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Legal Alert: Joint Check Agreement Did Not Protect Supplier from Preference Claim