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City of Detroit Sues Vendors to Recover Millions in Preferential Payments

The City of Detroit filed lawsuits today in the United States Bankruptcy Court seeking to recover millions that the City paid to its creditors before it filed for protection under Chapter 9 of Bankruptcy Code. Each lawsuit seeks to recover payments ranging from the low hundreds of thousands to millions of dollars. The City retained the New York law firm of Togut, Segal & Segal LLP to file and litigate the lawsuits. The City seeks to recover the payments as preferential transfers. Under section 547 of the Bankruptcy Code, the City may recover payments it made to creditors within 90 days before the City filed for bankruptcy if the City can show the payments allowed the creditor to receive more than it would have received in a Chapter 7 liquidating bankruptcy case, and that the payments were made on account of an antecedent debt and while the City was insolvent. The creditors being sued, in turn, may raise a number of defenses, the most common of which are that (i) the payments were made in the ordinary course of business, (ii) the creditor provided valuable goods or services, known as "new value," contemporaneously with the payment, or (iii) the creditor continued to provide new value after receiving the payment.

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