Detroit Bankrutptcy: City Demands Repayment from "Essential Vendors" Assured Payment by DWSD in 2013

On November 30, 2015, the City of Detroit began filing claims against contractors and other vendors who were received payments in the 90 days leading up to the City's July 18, 2013 bankruptcy filing. Crain's first reported this story here.

When the dust settled last Friday, the filing deadline was December 5th, over 185 preference claims had been filed, including almost 40 against DWSD contractors, vendors, and professional service providers: 

1. Alexander Chemical Corp.
2. Applied Science, Inc.
3. Bankston Construction
4. Bill Johnson Group
5. Camp Dresser & McKee
6. Carmeuse Lime, Inc.
7. CDM Michigan, Inc.
8. Clow Water Systems Company
9. Colasanti Corporation
10. DA Central, Inc.
11. DeMaria Building Company
12. Detroit Advanced Technology Application Network (DataNET)
13. Detroit Radio Team
14. EJ USA, Inc.
15. Federal Pipe & Supply Inc.
16. Hercules & Hercules, Inc.
17. Hesco Hamlett Engineering Sales Company
18. Hinshon Environmental Consulting, Inc.
19. Imperial Construction Co.
20. Inland Waters Pollution Control Inc.
21. L. D'Agostini & Sons, Inc.
22. Lakeshore Engineering Services, Inc. 
23. Macomb Pipe & Supply
24. Metco Services, Inc.
25. Motor City Electric Technologies, Inc.
26. Motor City Pipe & Supply Co. 
27. New England Fertilizer Company (NEFCO)
28. North-West Trading Co.
29. Project Innovations
30. PVS Technologies, Inc.
31. Tetra Tech MPS
32. Tooles Contracting Group, LLC
33. Trinity Environmental Solutions, LLC
34. Tucker Young Jackson Tull
35. Wade Trim Associates, Inc.
36. Waste Management of Michigan, Inc.
37. Z Contractors, Inc. 

Many of these contractors and vendors are quite surprised, outraged actually, at having been sued to return payments when DWSD explicitly assured many of them in 2013 when it issued so-called "essential vendor" letters which represented in part:

"DWSD intends to pay all amounts owed to you, even if such amounts relate to your supply of goods or services to DWSD prior to the City of Detroit's bankruptcy filing."

The City's actions, however, are common to many bankruptcy proceedings where the trustee of a debtor, asserts its power under Section 547(b) of the Bankruptcy Code to recapture or claw back payments made by the debtor during the 90 days prior to filing of the bankruptcy petition.

Since Detroit filed bankruptcy on July 18, 2013, the preference period in this case begins on April 19, 2013. 

The burden of establishing that a payment is a preference, and subject to repayment, initially falls on the trustee. The trustee must show that the payment was: (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent;  (4) made on or within 90 days before the date of the filing of the petition; (5) that enables such creditor to receive more than such creditor would receive if— (A) there was a liquidation of the of the debtor's estate under Chapter 7. 

Comment: What's unclear about the City's actions against DWSD contractors and vendors is what affect, if any, the City's post-bankruptcy assurances ("essential vendor" letters) will have, together with other representations that DWSD has made over the years that it operated as "an enterprise fund department" and did not receive funds from the City's general fund.  If projects were funded by bonds sold and earmarked for specific projects, can the City claim payments made were "preferences"?

In addition, many of the projects were undertaken by DWSD in order to comply with federal regulations and its own federal (NDPES) discharge permit.

What is clear, however, is that many DWSD contractors now feel betrayed by the City's actions. There are more than a few multi-million dollar preference claims on the list above, and I fully expect that these claims will be litigated, and appealed if necessary.

We'll keep monitoring developments in the City's bankruptcy proceeding.

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