The Uses and Abuses of Joint Checks:
An Overview of the Issues That Arise
When You Use Joint Checks
William C. Last, Jr.
Payment of a balance due by a check issued to two or more payees is a common practice in the construction industry. It is equally common to find a provision in a subcontract that allows the general contractor to unilaterally make the decision to issue a joint check to a subcontractor and its supplier.
While joint checks are commonly used, many contractors and suppliers are unaware of the legal ramifications of such checks. This article will review a number of issues that arise when a joint check is used.
What Is a Joint Check Agreement?
As stated, many subcontracts include a joint check provision. Typically, those provisions give the general contractor the unrestricted right to issue joint checks to the subcontractor and its suppliers.
It is also common for a supplier to require that the general contractor to execute a stand alone joint check agreement before the supplier will extend credit to the subcontractor. There are generally two forms of such joint check agreements.
The first version will require that all payments to the subcontractor be in the form of a joint check. Such a version will also require the general contractor to guarantee that the supplier will be paid for all materials supplied to the subcontractor for the project in question. The second version is similar to the first version but does not include a guarantee or a requirement that all payments to the subcontractor be in the form of joint checks.
How Are Joint Check Proceeds Allocated Between the Payees on the Check?
In a case that was decided by the California Supreme Court (Post Bros. v. Yoder (1977) 20 Cal. 3rd 1), a general contractor issued a joint check to its subcontractor and the subcontractors supplier. The subcontractor and the supplier had a "gentlemen's agreement" whereby the supplier would endorse the check, the subcontractor would deposit the check and subsequently pay the supplier. However, the subcontractor kept the funds.
Subsequently, the supplier recorded a mechanic's lien and filed a lawsuit to foreclose the lien. The supplier lost the foreclosure lawsuit. The supplier also set forth a cause of action that sought payment on the payment bond.
The California Supreme Court recognized that use of joint checks was common in the industry. The Court went on to hold that (1) where subcontractor and its supplier are joint payees and no agreement existed with the owner or general contractor as to any allocation of proceeds, the supplier by endorsing the check was deemed to have received the money due him, and (2) because the joint check was deemed payment to the supplier, the supplier could not recover on the owner's or contractor's surety bond.
California Civil Code, § 1479, provides that proceeds of a payment are allocated in accordance with the intention of the debtor if manifested, and if not manifested the creditor may allocate in any manner chosen within a reasonable time. The court held that the section is not applicable to joint checks issued to a subcontractor and his supplier where the owner or general contractor is not the debtor of the supplier. When an owner uses a joint check he manifests his intent that the proceeds shall be divided among the payees to discharge obligations to them.
In essence it is the duty of the supplier to ascertain the intentions of the issuer of the check as to the allocation of the proceeds of the joint check. If the supplier fails to get written instructions from the issuer of the joint check prior to endorsing it, the supplier is deemed to receive all the check proceeds.
There are exceptions to the ruling in the Yoder case. One exception is when the owner designates the payment for specific merchandise. If the balance due for the merchandise is satisfied with a portion of the joint check the balance paid to the subcontractor is not applied to any other balance due the supplier.
Does endorsing a joint check only act to release lien rights?
California Civil Code section 3262 prescribes the mandatory language that must be included in the conditional or unconditional lien releases. If the check endorsement includes the mandatory language the endorsement of the check by the joint payees should constitute a lien release.
If the endorsement includes a statement that the payment is being received in full payment for the goods and services provided for a specific project, the issuer of the check may be able to argue that there is a full satisfaction and accord of the obligation to pay for the goods and services delivered prior to the date of the check. Thus, ending any duty to pay the joint payee who did not receive its share of the proceeds.
What are the legal ramifications if a party receiving a joint check wrongfully deposits the check without paying the other joint payee?
If a payee on a joint check wrongfully endorses and cashes a joint check, the issuer of the check may still be liable to pay the party that did not receive any of the proceeds of the check. In the case of Crystalplex Plastics v Redevelopment Agency of the City of Barstow (2000) 77 Cal App. 4th 990, a general contractor, Rectech, employed a subcontractor, Earth Inline Hockey, Inc. (EIH), who contracted with Crystaplex. After Crystaplex performed its obligations under the contract, the owner, Redevelopment Agency, issued joint check payable to EIH and Crystaplex. EIH allegedly forged Crystaplex's signature and deposited the check in its account. After Crystaplex failed to receive any of the proceeds from the check it sued the owner. The Court allowed the Crystaplex to recover from the owner.
The Court relied on certain provisions of the California Uniform Commercial Code (UCC) when it concluded that Crystaplex could recover its share of the check proceeds from the Redevelopment Agency. If a check is stolen from a payee, the payee may turn to his or her drawer for payment. UCC § 3-309, allows a person who loses a check by loss or theft to enforce it in specified circumstances. In the limited cases covered by UCC § 3309, the payee may sue the issuer of the check on a stolen or lost instrument, provided the payee indemnifies the drawer against the possibility of a second claim on the stolen check. As to the joint check payee issue, UCC § 3110 (d), provides that an instrument made payable to two or more persons, not alternatively, is payable to all of them and may be negotiated only by all of them. Therefore, joint payees are treated as one, and delivery to one joint payee is delivery to all of them. As a result the unpaid joint check payee could meet the requirement that it had possession of the check before it was lost or stolen.
Joint checks can be traps for the unwary. If you are an owner or general contractor, issuing a joint checks may be an effective method for ensuring that a supplier is paid. If you are a payee on a joint check you should ascertain if there is any existing agreement as to the allocation of the check proceeds. If there is such an agreement the allocation of the proceeds should be made in compliance with that agreement. If there is no agreement you may want to obtain such an agreement or instructions from the issuer of the check before you endorse the check. Under all circumstances if you issue joint checks or receive one as a co-payee you should determine the intentions of the party who issued the joint check and comply with his wishes.
This article, ©2004, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.