Joint Check Agreements
A common credit management devise is the joint check agreement. This requires the consent of more than one player on the construction project. The creditor supplier needs the consent of not only of the debtor customer, but also the customer's buyer (normally the general contractor). An owner or general contractor needs the consent of the debtor customer, but may also want agreements or waivers from the creditor supplier.
The next important thing to understand about joint check agreements is that they vary tremendously in how they are worded. There is no such thing as a “standard” joint check agreement. You do not know what rights it gives you until you see it. Some joint check agreements actually remove more rights than they give, by including a waiver of mechanic's lien and bond rights.
The most commonly used joint check agreements are not actually “security,” and this difference can be very important in the event of bankruptcy.
Joint Check Agreements for Seller-Creditors
Seller-creditors would certainly prefer a guaranty from the owner or general contractor. Here, the general contractor guarantees that the supplier will be paid no matter what problems are with the subcontractor. This option should be remembered, although the word “guaranty” usually sends shivers up and down spines.
Another option is to request that materials be sold on the owner's or general contractor's account. This avoids the risk of liens or bond claims on this project, and the general contractor may avoid a mark-up on the materials.
If these options are rejected, a joint check agreement may be an opportunity. Joint check agreements do vary tremendously in how they are worded, so the seller would certainly prefer to draft the joint check agreement if possible. If someone else drafts the agreement, it is important to make sure the Creditor is not giving up rights such as a waiver of mechanic's lien and bond rights.
The most important thing for a seller to remember about a standard joint check agreement is that IT ONLY HELPS IF A CHECK IS EVER WRITTEN. For example, you may supply materials to a construction subcontractor and you may have a joint check agreement with the general contractor. However, the general contractor may later assert back charges against the sub or claim that the subcontractor never completed its contract. If the general contractor is not obligated to pay the sub, the general contractor is also not obligated to write a check and the joint check agreement will do no good. A joint check agreement is a terrific opportunity to establish the trust fund provision discussed below. Remember that the trust fund provision does not place any additional burden or risk on the general contractor or the customer. It just puts the supplier in a better position vis-à-vis the other creditors of the customer, including the customer's secured lender. Both the supplier and the general contractor would be in a much stronger position, especially if the subcontractor files bankruptcy. General contractors on bonded projects do not want the risk of liability to a supplier on a payment bond, when the general has already paid the subcontractor in full. This is discussed in detail in the Construction Law Survival Manual chapter on Trust Fund Agreements available for free at www.FullertonLaw.com
Suppliers may also succeed in slightly rewording the standard joint check agreement to include an outright assignment of funds or a security interest in the accounts receivable to be due to your buyer. This is security, which would make you a secured creditor in the event of bankruptcy. Without this security, your buyer's accounts receivable go into the general bankruptcy fund to pay all general unsecured creditors. With the security interest, you may have first claim to this one fund.
With an assignment of funds, you are already the owner of the fund, not your customer. These mechanisms are not in the joint check agreement at the Appendix, although an Assignment is shown in the Construction Law Survival Manual. It is probably better for you to use the assignment of funds, thesecurity interest or the trust fund provision, but not more than one of these mechanisms in one document. If the intent is ambiguous or contradictory in the document, there is greater risk you will get no remedy at all. The trust fund agreement is probably preferable.
The first form at the Appendix includes a guaranty of the account and a trust fund provision. If someone objects to one of these provisions, it can be stricken out of the form and you will still have some of the important protections included in the form.
A creditor also wants a joint check agreement that requires checks be sent directly to the supplier and provides a power of attorney to endorse checks on behalf of the customer. This solves the problem of the debtor that disappears, refuses to endorse a joint check or refuses to give it to the creditor. The debtor can also agree that the owner or general contractor can rely on the creditor's statements of the total current indebtedness to the creditor. In other words, the debtor may tell the owner or general contractor to issue a check in a lower amount or instruct the owner of general contractor not to issue any check, especially if there is a dispute with the supplier. In this provision, the debtor has agreed that the owner or general contractor can rely on the amount due to the seller in statement of account from the seller. This provision essentially lets the money flow and makes the debtor take up any dispute with the supplier later. The first form at the Appendix includes all of these provisions.
Joint Check Agreements for Owners and General Contractors
An owner or general Contractor may want or be willing to agree to joint check agreement to attract better suppliers or better pricing. These arrangements may also allow the use of cheaper subcontractors that cannot otherwise get supplier credit. Any time that marginal subcontractors are used, however, the general contractor must take on the greater administrative burden of policing the subcontractors. To protect against mechanic's liens and payment bond claims, the general contractor must be aware of all suppliers and make sure that they are paid. The subcontract should require a complete list of suppliers on the project and prohibit the use of unauthorized suppliers. This allows an owner or general contractor to make sure they have lien waivers from all suppliers on the project at each progress payment. A general contractor should also require the debtor to come to the general contractor's office to endorse the joint check and then the general contractor should deliver that check to the creditor. This eliminates any risk of forgery on the check and makes sure the check is actually delivered.
A trust fund agreement in subcontracts and joint check agreements, discussed above, is as beneficial to a general contractor as it is to a creditor supplier. This does not add any additional burden or risk on the general contractor and provides important protection to both the general contractor and the supplier if the subcontractor files bankruptcy.
A general contractor does also have an opportunity to get added protection by getting a supplier to waive various rights. Most importantly many general contractors get unwary suppliers to waive mechanic's lien and bond rights in exchange for the joint check agreement before supplying. A supplier can also agree to a “Pay if Paid” provision, eliminating any obligation in the general contractor if payment is never received from the owner. A general contractor may also say that the agreement does not create any contractual rights in the creditor and is made “solely as a convenience.” All of these provisions are shown in the second form at the Appendix.
Trust Fund Agreement
Trust Fund Statutes and Trust Fund Agreements are discussed in detail in the Construction Law Survival Manual available for free at www.FullertonLaw.com. However, they are an important and underutilized opportunity for joint check agreements and other contracts.
Suppose a bankrupt debtor is the trustee on his niece's college tuition trust fund. The bankruptcy debtor's creditors cannot attach this college trust fund, because it is not the bankruptcy debtor's money. The money belongs to the niece. The trustee has only “legal” title. The niece is the “beneficiary” of the trust and has “equitable” title to the money.
Some states have trust fund “statutes” or laws to protect subcontractors and suppliers in the construction industry, including Maryland, New York and New Jersey. When a general contractor receives payment from the construction project owner, the general contractor holds funds in trust for the benefit of the subcontractors and suppliers. Subcontractors then hold funds in trust for their suppliers.
Even in states without trust fund laws, it is possible to create a trust fund relationship by agreement. This works just like a bank trust fund (or the college tuition trust fund for the niece) and would apply in any non-construction industry. It is possible to add clear trust language to a joint check agreement, credit agreement, proposal, quote or to any contract with just a few sentences.
Customer agrees that all funds owed to Customer from anyone or received by Customer, to the extent those funds result from the labor or materials supplied by Seller, shall be held in trust for the benefit of Seller (“Trust Funds”). Customer may commingle Trust Funds, but agrees it has no interest in Trust Funds held by anyone and to promptly account for and pay to Seller all Trust Funds.
We believe that this language creates a trust fund relationship that should work just like the trust fund laws. Your debtor agrees that all funds received are held in trust, to the extent funds result from your labor or materials. If your debtor files bankruptcy, these funds will not be property of the bankrupt estate. You will not need to share with the general unsecured creditors and should be able to keep these funds as the trust beneficiary.
This language should also be relatively easy to “sell” to a customer on a credit agreement or quote. The customer certainly intends to pay you promptly on receipt of funds. That is all this language says. It does not create any additional burden or cost on the customer. The issue is whether you would have to “share” this receivable with your customer's other creditors in the unlikely event of insolvency. This language allows you to identify your customer's receivable as produced or created by the labor and materials you supplied and claim ownership of that receivable.
Since your debtor is never the owner of trust funds, it is also impossible for the debtor to grant a security interest in trust funds. The trustee could not give away or sell trust property, since a trustee does not have title. The beneficiary of the trust could claim ownership of the trust property, even in the hands of third parties. By the same token, a trustee cannot grant an effective security interest in trust property. The trustee has no good title to sell, give away or grant a security interest in trust property.
Accordingly, trust fund laws or agreements are one way that a vendor can gain priority over a customer's bank that has a blanket security interest on receivables. This also makes sense. You are essentially saying to a customer that you will not give them the value of your labor and materials if some other lender will have priority over the receivable that is generated by the value you provide. You can refuse to supply labor or materials unless you will have absolute first priority to the value you provided. This absolute first priority is a trust fund agreement.
In the event of bankruptcy, the trust funds held for the benefit of subcontractors and suppliers do not become a part of the bankruptcy estate. While the creditor may need to get appropriate bankruptcy orders, the creditor may be entitled to payment directly from an owner or general contractor. A trust fund claimant may even be able to obtain payment from the bankruptcy estate, by bankruptcy court order, since trust funds are not property of the bankruptcy estate and always belong to the beneficiary.
Trust fund laws or agreements can also be very helpful in “preference” litigation. If a creditor received payments less than 90 days before a bankruptcy, the creditor may have to give the money back as a “preference.” If a trust fund law or agreement applied, however, the payment cannot be a preference. The debtor was giving you your own money. It was never the debtor's property and was not a payment from the debtor.
Trust fund agreements may be more effective in contracts, proposals, quotes, joint check agreements or other agreements created for a particular project for a particular owner. There is no downside, however, to putting a blanket trust agreement in your credit agreement to cover all sales to this customer.
JOINT CHECK AGREEMENT
In consideration of the sum of one dollar cash in hand paid and the supply of labor and/or materials by Seller on the Project, the receipt and sufficiency of which is hereby acknowledged, _____________________________________________, owner or general contractor (“Owner/G.C.”) and _____________________________________________, contractor or Seller's customer (“Contractor”), agree as follows on behalf of _____________________________________________ (“Seller”), whose address is _____________________________________________________________________________:
1. All checks issued by Owner/G.C. to Contractor for (all labor or materials supplied) or (only for the Seller's sales price of material supplied by Seller) on the _____________________________________ construction project (“Project”) shall be made jointly payable to Contractor and Seller and shall be promptly delivered to Seller. Owner/G.C. may rely on any written notice provided by Seller, stating the total current indebtedness of Contractor to Seller and limiting any obligation under this Agreement for any current requisition. Contractor appoints Seller its attorney in fact to sign or endorse on behalf of Contractor all checks received from Owner/G.C.
2. Contractor agrees that all funds owed to Contractor from anyone or received by Contractor to the extent those funds result from the labor or materials supplied by Seller shall be held in trust for the benefit of Seller (“Trust Funds”). Contractor may commingle Trust Funds, but agrees it has no interest in Trust Funds held by anyone and to promptly account for and pay to Seller all such Trust Funds.
3. Owner/G.C. hereby guarantees the payment of sums justly due from Contractor to Seller under their Credit Agreement for materials supplied to the Project.
4. This Agreement is not in payment of obligations of Contractor to Seller and will not affect Seller's rights to withdraw or refuse further credit, or Seller's rights to any payment bond, mechanic's lien, trust fund or other legal rights.
|OWNER OR GENERAL CONTRACTOR:||CUSTOMER OR CONTRACTOR:|
|Authorized Signature:||Authorized Signature:|
(Printed or typed)
(Printed or typed)
JOINT CHECK AGREEMENT
This Joint Check Agreement is dated this ____ day of _____, ________ by and between
GENERAL CONTRACTOR CONSTRUCTION COMPANY (“General Contractor”) and _________________(“Subcontractor”) and ___________________(“Supplier”).
Whereas, Supplier sells labor and/or materials to Subcontractor for use on ______________________
_____________________________________________________________(“Project”) and whereas Subcontractor performs work for the General Contractor in connection with this Project (pursuant to the “Subcontract”), and whereas Supplier is willing to supply Subcontractor with labor or materials if payment by General Contractor to Subcontractor is made by joint check payable to both Subcontractor and Supplier, where the Supplier has supplied labor or materials for the Project.
Now therefore, and for and in consideration of the mutual promises and benefits set forth herein, the parties hereby mutually agree:
In order to promote an uninterrupted flow of labor or materials to the Project, the parties agree that with respect to all labor or materials delivered to the Subcontractor by the Supplier on this Project, payment therefore shall be made by General Contractor by check made jointly to Subcontractor and Supplier, not to exceed the amount of _______________________($___________). Subcontractor shall endorse any check to Supplier and leave with General Contractor to disburse to Supplier. These funds are agreed to be funds paid in trust through Subcontractor to Supplier and are not the property of Subcontractor.
A copy of the contract or purchase order (“Supplier Contract”) and all Supplier's invoices under the Supplier Contract, initialed by Subcontractor and including shipment dates, shall be forwarded to General Contractor not later than three (3) days after date of invoice. All discounts shall accrue to General Contractor.
All parties hereby acknowledge the payment terms in Subcontractor's Subcontract. General Contractor's obligation to make payment under this Agreement shall be no greater than its obligation to make payment to Subcontractor under the Subcontract. It shall be an express condition precedent to any obligation of the General Contractor to make payment under the Subcontract or under this Agreement that the General Contractor has actually received payment from the Owner of the Project. In consideration of this Agreement, Supplier releases the Owner of the Project, General Contractor and any bonding companies from any and all lien or bond claim rights.
This Agreement may be executed in counterparts, which shall constitute but one and the same agreement. This Agreement does not constitute a guarantee of payment by General Contractor; rather it is an agreement on the method of payment to Subcontractor and Supplier. It is understood that this Agreement is made solely as a convenience to Supplier and it does not create any contractual rights between Supplier and General Contractor. Supplier agrees to continue supply of labor or material pursuant to the Supplier Contract regardless the status of payment to Supplier pursuant to the Supplier Contract. General Contractor may at its sole discretion discontinue this arrangement at any time with 24-hour written notice to Subcontractor and Supplier. All parties agree that this Agreement is to be governed by the laws of the Commonwealth of Virginia and that the forum for any litigation shall be Fairfax County, Virginia.