The Limits of Joint Check Agreements as a Risk Mitigation Tool

Material and service providers dealing with a financially distressed subcontractor on a construction project frequently use a joint check agreement as a risk mitigation tool. The holding of the United States District Court for the Eastern District of Virginia (the “Court”), in Myers Controlled Power, LLC v. H. Jason Gold, in his capacity as trustee for The Truland Group, Inc., et al. (In re The Truland Group, Inc., et al.) (the “Truland Case”), is a cautionary tale about the utility of a joint check arrangement that was entered into during the 90-day preference period.

Truland Walker Seal Transportation Inc. (“TWST”), a subcontractor on a largescale construction project, chose Myers Controlled Power, LLC (“Myers”) to supply certain electrical equipment and switches. The Court held that a joint check, issued by the general contractor on the project and payable to Myers and TWST pursuant to a joint check agreement, that Myers had received shortly before TWST had filed its bankruptcy case, was recoverable as a preference. The Court relied on TWST’s entry into the joint check agreement during the 90-day preference period, which subjected Bottom line, while Myers thought it was mitigating its risk by entering into a joint check agreement and collecting the proceeds of a joint check, Myers instead found itself embroiled in, and then losing, a very expensive and time-consuming preference litigation. And, this unfortunate result was avoidable (no pun intended)!