Doral Financial Corp. and Puerto Rico government officials were back in the public eye Tuesday, when both parties took to the media to defend their reasons for a collapse in court-ordered negotiations regarding a $229 million tax refund the former is claiming, and the latter rescinded.
While Doral blasted the government — represented by the Treasury and Justice Departments — for allegedly walking away from the table, the agencies released a joint statement saying the draft contract that Doral presented during negotiations was vastly different from the preliminary agreement reached with the Court of First Instance during hearings in recent weeks.
“The preliminary arrangement Treasury and Doral initially agreed in the Court of First Instance stipulated the recognition of an asset [the “Interest Only asset”] that Doral could sell to other parties in STRIPS using vouchers, as appears from minutes of the proceeding included by Doral as Appendix I of Motion filed on Aug. 21, 2014. These vouchers would carry the right to specific future annual deductions granted by the Treasury,” the government said.
“The preliminary arrangement, which is part of the public record of the case in the Court of First Instance, did not contemplate the issuance of vouchers or securities by the Commonwealth,” the agencies said.
On Aug. 14, Doral presented Treasury with a draft contract for the arrangement that was “vastly different from the preliminary agreement reached with the Court of First Instance,” the government said, adding the document drafted by Doral proposed that the Commonwealth create and issue a voucher to be sold to third parties.
“As drafted by Doral, these vouchers would be considered a security under local and federal laws. The issuance of securities by the Commonwealth requires legislative approval, which Doral knew,” the government said.
Subsequently, last Friday Treasury claims it presented Doral with its suggested changes to the contract. The changes stipulated that the issuer of the voucher should be Doral, as the IO asset is a Doral asset, not an asset of the Commonwealth.
“The government will vigorously defend its rights in the court,” the agencies said.
Meanwhile, during a conference call held earlier in the day, Doral representatives Robert J. Shapiro, chairman of the advisory firm Sonecon and former U.S. Undersecretary of Commerce for Economic Affairs, and Matthew D. McGill, the bank’s chief legal counsel and partner at Gibson, Dunn and Crutcher, said the government’s decision to walk away could be “an expensive proposition,” and urged Gov. García-Padilla to step in.
“It is an expensive proposition for Puerto Rico to renege on its agreements, and as a result, the Government is squandering what little credibility it has left with investors. It is the people of Puerto Rico that will bear the brunt of the costs. Governor [García] Padilla can be a leader — he can resolve this, and I sincerely urge him to do so,” Shapiro said.
During the call, Shapiro announced the release of his latest study — A “Penny-Wise and Pound-Foolish” Policy: The Costs to Puerto Rico of the Treasurer Nullifying its Agreements with Financial Institutions, Including the Possibility of a Sovereign Debt Default — which concludes that the Puerto Rican government’s failure to settle with Doral could lead to losses in investment, economic growth, and revenues that will far exceed the cost of simply paying Doral what the company is owed.
Regarding the failed negotiations, McGill described the Doral legal team’s disappointment with Treasury’s abandonment of negotiations, but noted its confidence in the subsequent trial.
“The government has walked away from an agreement and has sent us back to the course of litigation and a trial. It is a disturbing trend and an unfortunate result because there could have been an amicable resolution to this matter,” McGill said.
“The government owes Doral money and the government does not want to pay. We will go to court to make them pay,” he said, referring to the trial scheduled for Sept. 16-18 in San Juan.