Detroit seeks $50M from vendors paid before bankruptcy

DETROIT — Detroit emerged from the nation's largest bankruptcy almost one year ago, but some of its creditors this week are finding themselves under the gun to pay back the city.

The city on Monday filed suit against nearly 40 vendors who were paid more than $40 million in the three months before the city filed for bankruptcy protection.

City officials said they intend this week to file a total of 185 actions in U.S. bankruptcy court in Detroit against vendors who received "preferential payments" worth about $50 million made in the 90 days before the city's historic July 2013 Chapter 9 bankruptcy filing.

Although the city exited bankruptcy protection in December 2014 with a financial restructuring plan, the case remains under the jurisdiction of a federal bankruptcy judge.

The affected vendors might need to repay money the city paid them for goods and services so that other unsecured creditors in a similar situation can be compensated more fairly, experts say. The payments are recoverable because they are considered "preferences" under the U.S. Bankruptcy Code, according to city officials.

"It is our hope that the City will be able to recover a substantial portion of these payments, which could then be used to support further improvements to city services," Chuck Raimi, the city's deputy corporation counsel, said in a statement Monday

It was unclear immediately how much of the recovered funds could go to the city for services and how much would need to be redistributed to other city creditors who were not paid in full as a result of the bankruptcy. Experts say it is unlikely that most creditors who previously settled with the city, including pension holders, would see additional money as a result of the lawsuits.

Mayor Mike Duggan said in an interview that the suits were anticipated as an option for the city under its bankruptcy-exit plan. But the mayor said questions about the details of the lawsuits should be directed to the city's lawyers.

As of late Monday afternoon, the city filed 39 claims for $40.1 million for various companies doing business with Detroit. The city's largest claim was filed against Inland Waters Pollution Control Inc. for $4,733,934.93, but most individual creditors had been paid between roughly $250.000 and $1 million during the three-month period.

The lawsuits against construction, technology and other types of companies, however, may never come to trial, according to the city.

"Every effort will be made to reach mutually acceptable settlements of these lawsuits, if possible," Raimi said in a statement.

New York bankruptcy law firm Togut, Togut & Segal LLP represents the city in the matter, according to court papers filed Monday. Albert Togut, managing partner of the law firm, did not immediately return a call for comment.

A 2006 Wall Street Journal profile wrote that "Albert Togut occupies an unusual niche in the rough-and-tumble world of bankruptcies: He makes his living representing clients who have been rejected by their own law firms." The newspaper reported he billed at a rate of $795 an hour for his services, slightly below the $850 peak hourly rate in the bankruptcy field at the time.

A spokesman for the mayor said Monday he could not immediately provide details about the law firm's contract or rate structure with the city.

Under time limits imposed by bankruptcy code, Detroit is required to file these preference actions before Dec. 5, city officials said.

Experts said that the city's legal move is common in other bankruptcy proceedings in which a debtor is obligated to treat its creditors as fairly as possible if they have a similar relationship with the city.

"The rationale is that it is a more equitable distribution" of the city's limited assets when creditors who had been paid immediately before the bankruptcy filing share some of the financial hit as those who are still owed money, said Douglas Bernstein, managing partner of banking, bankruptcy and creditors' rights practice group at Plunkett Cooney law firm in its Bloomfield Hills office.

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