Doral Financial Corp. filed a lawsuit at the San Juan Superior Court and a Writ for Certification in the Puerto Rico Supreme Court, alleging that the government illegally nullified its agreement to refund the bank nearly $230 million in tax overpayments.
In the civil suit filed in Superior Court, the holding company of Doral Bank claimed — as it has repeatedly over the past two weeks — that the Treasury Department’s determination to nullify an agreement signed in 2012 granting the refund “was not only unlawful and beyond its authority, but if upheld, it would undermine the ability of the department to negotiate future agreements and undercut the reliability of all contracts and promises made by agencies of the Commonwealth.”
The bank also turned to the Supreme Court with an emergency request for that forum to immediately take up the case, seeking an expedited resolution, the attorneys for Doral said during an afternoon conference call with members of the media.
Doral and Treasury have been sparring since early May over a decision by the agency to nullify an agreement granting the refund that had to do with the bank’s re-statement of earnings between 2002 and 2004 based on a portfolio of Interest-only strips, for which it reportedly overpaid taxes and reached an agreement with the agency to get back.
“This is a blatant violation of contract and lawless act by the Hacienda and the Commonwealth of Puerto Rico,” said Ted Olson, lead counsel for Doral Financial Corp. and former U.S. Solicitor General.
“Doral and the Commonwealth have a binding and enforceable agreement that awards Doral the tax refund it is owed,” he said. “If this administration can tear up the agreements reached by the last administration, then no taxpayer, employer, or investor in Puerto Rico is safe. We will ask the courts to uphold the rule of law and require that the Commonwealth live by its agreements.”
Olson is one of a battery of attorneys — along with Matt McGill of Washington, D.C.-based Gibson Dunn & Crutcher LLP, and Ramón Rosario and Anthony Murray, counsel in Puerto Rico — the bank hired to plead its case.
In the lawsuit, Doral warned that by abrogating its obligations, Gov. Alejandro García-Padilla’s administration is poised to inflict economic harm not only on the institution, but on the economy as a whole.
“The economic harms are not only to Doral, which is already suffering a significant impairment of its capital and losses to its bondholders and shareholders, but also tothe economy of Puerto Rico and its citizens,” the bank said in the lawsuit. “If the [Treasury] Department’s actions are upheld, there will be an immediate loss of more than 1,000 jobs, losses to several hundred suppliers of goods and services to Doral, the loss of a major lender in the Puerto Rico housing market to the detriment of home buyers [who will see higher interest rates], reduced competition for deposits, which will reduce interest paid to depositors, a loss of more than [$50] million in payroll and other taxes paid to Puerto Rico, and the imposition of higher rates in the future for Puerto Rico to access the financial markets and fund its necessary expenses.”
With its statements Doral is implicitly saying that, if the matter is not resolved, the bank could pull out of Puerto Rico.
During the call, Doral’s attorneys said the bank had been trying to convince the government to resolve the matter amicably, and out of court.
“In that context, the bank’s leadership was left with no other option than to take this legal action to protect its rights under the law and the interests of its various stakeholders, including its counterparties, bondholders, preferred shareholders, stockholders, employees and customers,” said Doral Financial Corp. CEO Glen Wakeman.”
In a statement issued late in the day, Treasury Secretary Melba Acosta said the lawsuit and Doral’s allegations “had no merit.”
“Doral’s request for a refund is invalid and the alleged overpayment never happened,” she said. “The Justice Department will vigorously defend the Commonwealth in this lawsuit.”
Doral, however, claims it submitted all evidence of payments for the amount in question.