Doral Financial Corp., the holding company for Puerto Rico's second-largest mortgage lender, sued the island's government for voiding a 2012 agreement to pay a $230 million tax refund.
The Puerto Rico Department of Treasury's action was "unlawful and beyond its authority," according to a complaint filed today in San Juan Superior Court and made available by Doral's lawyers. A separate request was filed today seeking review by the island's high court, Doral said in a statement.
"The department has arbitrarily and unreasonably ignored its contractual obligations, the financial and economic losses its decisions will cause and its obligations under the Puerto Rico Internal Revenue Code," Doral said in the filing.
The demand comes amid a slowdown in Puerto Rico's economy, which has shrunk in five of the past seven fiscal years. In February, the U.S. commonwealth's debt was cut to speculative grade by the three largest credit-rating companies. Gov. Alejandro Garcia Padilla has proposed a series of budget cuts to help tackle the island's mounting debt load, including freezing public workers' salaries and closing about 100 schools.
Last month, the Federal Reserve Bank of New York told Doral to write off the refund as a loss on its balance sheet after Puerto Rico's treasury department ruled that the San Juan-based company wasn't entitled to payment.
"This lawsuit and the allegations contained within are without merit," the treasury department said in an emailed statement. "Doral's request for a tax refund is not valid and its alleged overpayment of taxes never took place."
The refunds in dispute stem from the company's overstatement of earnings from 1998 to 2005, Matthew McGill, an attorney for Doral, said at a press conference today.
Doral announced in September 2005 that it would restate its earnings before taxes as of the end of 2004. The following year, it agreed to pay a $25 million fine to settle an investigation by the U.S. Securities and Exchange Commission into whether it had overstated earnings from 2000 to 2004. The company neither admitted nor denied regulators' allegations in the settlement, the SEC said at the time.
Doral's excess tax payment on the overstated earnings was first memorialized in a 2006 agreement with Puerto Rico's treasury department, McGill said at the press conference. A superseding agreement followed in 2012. A third, signed in December, addressed tax overpayments not covered by the 2012 accord, according to the complaint.
Puerto Rico's refusal to honor its agreement threatens to undermine all contracts between government agencies and private parties, Doral said in its complaint. The decision also jeopardized more than 1,000 jobs and may result in losses to hundreds of Doral's suppliers, the company said.
"This is very unfortunate as we've been unsuccessful in convincing the government to resolve the matter amicably," Doral Chief Executive Officer Glen Wakeman said in the statement.
Doral, which hasn't posted an annual profit for almost a decade, is deciding whether an impairment charge related to the refund should be taken in the fiscal second quarter and how much it should take, the company said in a June 2 regulatory filing.