Garnet Capital Advisors Blog

Doral Financial, holding company for Doral Bank, prevailed in its recent legal battle with Puerto Rico's Treasury Department, which involved a disputed tax refund.

Court of Instance sides with Doral
San Juan-based Doral announced on Friday, Oct. 10, that Puerto Rico's Court of First Instance had sided with the company. As a result of the ruling, made by Puerto Rico Superior Court Judge Laureana Perez, the Treasury Department will refund Doral $229.9 million over the course of five years, according to Bloomberg.

Matthew McGill, who works for global law firm Gibson, Dunn & Crutcher and serves as Doral's chief legal counsel, commented on the situation.

"We are deeply gratified by the court's ruling," he stated. "The court carefully listened to all the evidence and has ruled definitively that Doral's tax agreement is valid and effective. ... Doral stands ready to work with Hacienda to put this litigation behind us all and to move forward serving the people of Puerto Rico."

The court decision came at a good time for the firm, seeing as how it last reported an annual profit in 2005, the media outlet reported. Amid these financial difficulties, Doral has encountered pressure to collect the refund.

Lawsuit basis
The dispute centered around a 2012 agreement, which allowed the company to reclassify money it alleged it had overpaid in taxes as a prepaid tax asset, according to American Banker. When Doral requested a refund, the Treasury Department refused, backing up its decisions with several justifications, including a claim the statute of limitations had passed.

When explaining why it nullified the agreement, Treasury Secretary Melba Acosta-Febo noted the statute of limitations, and said the deal was never recognized on the government accounting books, Reuters reported. Government officials pointed out other matters, asserting that fraud was involved in coming to the agreement. In addition, they identified discrepancies in company documents.

Upon receiving this decision, Doral filed a lawsuit, alleging the defendants "acknowledged that Doral was entitled to a refund" in prior agreements and claiming its constitutional rights were breached, according to American Banker.

Economic challenges
The company and the government agency began disputing the tax refund at a time when Puerto Rico's economy, which has had a hard time growing since 2006, was encountering challenges, Bloomberg reported.

Some have expressed doubts over whether the territory and its government agencies would be able to repay their debts, and amid these concerns, the three major credit ratings agencies slashed Puerto Rico's credit rating to speculative grade in February, according to the news source.

While these economic challenges may be troublesome, Perez indicated she didn't consider them when providing her ruling, the media outlet reported. More importantly, the Treasury Department failed to prove that Doral had either misrepresented or falsified the facts that pertained to the refund agreement, she decided.

On Oct. 10, Puerto Rico's Treasury Secretary announced she would appeal the Doral case. The government official emphasized that until the appeals process is over, the territory will continue to dispute the refund.

'Great day' for rule of law
While she seems wholeheartedly opposed to the court's decision, McGill provided a different point of view.

"The court carefully listened to all the evidence and has ruled definitively that Doral's tax agreement is valid and effective," he said. "It's a great day not just for Doral but also for the rule of law in Puerto Rico."