The lawsuit alleges the president authorised the spending of a quarter of a million dollars to renovate a building owned by members of his family to accommodate six Uighurs resettled in Palau in 2009.
The tiny island nation accepted the Uighurs on a temporary basis after the United States refused to send them back to China, which had described them as terrorism suspects.
Mr Toribiong has told Radio Australia's Pacific Beat the building was chosen for its security.
"My first concern when I received the Uighurs was their security - a lot of Palauans were very afraid of them...and noone in the community wanted to receive them into their own community - no hotels were willing to receive them and no aparments were willing to receive them," he said.
"The only place which we found to be secure was a place where a bank was located on the third floor, which belongs to my brother, who was a senator, and therefore it was chosen.
"They have been safe and they are very happy and therefore I do not see any reason why I should be sued other than the technical argument that I did not follow the procurement laws."
Mr Toribiong has defended his actions saying there was no time to call for competitive tenders for the work as the arrival of the Uighurs was imminent.
"Bidding takes 45 days to secure anything...but since security was the top issue here, since the notice of their arrival was so close to their arrival, my decision was to use it for their benefit only and for their security," he said.
"Security was my number one issue and therefore I took the money to be used for their benefit, not for the benefit of Palauan people, and therefore it was used only for their benefit."
Mr Toribiong says the lawsuit appears motivated by elections scheduled for November.
"I've explanied everything to the congress, both the house and the senate, and when I accepted the Uighurs I consulted and obtained the consent of the presiding officers...and the council of traditional chiefs, and therefore I take this to be a politically motivated lawsuit," he said.
"Why didn't they file this way back in time?"