The Doral Lawsuit

As expected, Doral sued the Department of Treasury for not honoring its agreements dated 2006, 2012 and 2013. More importantly, Doral requested interjurisdictional certification to the Supreme Court of Puerto Rico. This is done when a case needs urgent attention. I will discuss the case and its implications. The complaint and other documents can be viewed here.

The September 26, 2006, Treasury and Doral signed a final agreement (closing agreement) to prevent the latter from amending their 1998-2005 returns and claim the overpayment made ​​during these years. That means that the Treasury had no money back then and the debt became an intangible asset and used as a credit for future taxes. The agreement allowed Doral to write off the debt of $ 889,723,361 for 15 years. Clearly, when the 2006 agreement on the forms 1998-2005, this was not time barred.

The March 26, 2012, Doral and Finance reached another agreement extinguishing the old on in a novation. Novation is a legal concept which means that the parties to an agreement decided to change the agreement so that there is a new agreement, different from the previous and the earlier agreement ceases to exist. A totally new agreement is created then. The new agreement recognized that Doral overpaid taxes and even though the bank still had a $766,280,289 credit, the parties agreed to lower this amount to $ 229,884,087 (the details are discussed in the application). Doral also committed to the expansion of some social programs such as preservation of homes and commercial development that the Bank valued at $ 70,000,000.

Importantly, section 6051.07 of the Internal Revenue Code of PR, 13 LPRA § 33207, clearly states that such agreements are final unless it fraud, deceit or misrepresentation of a material fact are proven. Clearly the onus is on the party claiming nullity.

Again, on December 30, 2013, this time Melba Acosta again the Secretary of the Treasury, the overpayments are recognized. This deal is not about what the previous one but shows that this is done every day in the PR Treasury. However, on April 15, 2014, the Department of the Treasury sent a letter to Doral claiming that PR did not receive any benefit in the contract and gave the Bank ten days to justify the deal and on April 23, Doral did so. On May 14, 2014, the Treasury sent Doral letter stating that the Department had declared the contract void being simulation or unlawful device and that the amounts claimed were time barred.

Those are the facts alleged, and each claim is supported by the aged documents to the petition, which is in the link I posted at the beginning.

Apart from the law of the Internal Revenue Code that I quote, it is important to remember that these two contracts were final and constitute a transaction, contract defined by the Civil Code, Article 1709, as one made to avoid a lawsuit or a continuation of one already filed. Moreover, the affirmative defense of statute of limitations may be waived even in a litigation. Ergo, the reasons advanced by the Department of the Treasury do not seem reasonable. This brings me to my conclusion of several days ago that the fact that the President of Doral is the former Secretary of the Treasury under Fortuño is the real reason for this anomaly. In other words, pure party politics.

We knew this issue was coming but figured it would not be in time to save Doral due to the 120-day (of which only 100 remain) period set by the FDIC to resolve the issue of Tier 1 capital funds. For that reason Doral deftly resorted to interjurisdictional certification. This request is one that has been used several times in the past, most recently in the case of v Teachers Association. ELA, The procedure allows the Supreme Court to decide cases directly, without having to wait for the Courts of First Instance and Appellate Courts, a process that takes many years. How did Doral justify this?

Doral is a conglomerate of companies and employs more than 1,000 people with a payroll of $ 50 million and serves 300,000 customers. Recently, three Banks in PR were closed, and there are few left, Banco Popular, First Bank, Oriental, Santander (which is about to leave), Scotiabank and Doral. If the latter disappears, local Banks, weakened as they are, will weaken further and that means fewer loans to businesses in PR. It also indicates that if it is no certified by the PRSC, the dispute would become moot. This is an obvious reference to a liquidation by the FDIC. Ironically, if this happens, the FDIC will remove the case to Federal Court and demand payment form the PR Treasury Department and will likely win..

Doral claims that the Treasury Department has abrogated the power to declare a contract which is reserved under the Constitution to the Courts and it is right. The Treasury Department should have filed a declaratory action lawsuit such as the one filed by Doral to determine the contract illegal. It did not do it because possession is 9/10’s of the law.

 

Doral also claims that the action by the Treasury Department was ultra vires (contrary to the rules) and violates its constitutional rights. These alleged violations are:

a) Due process of the law was violated-This has two aspects: procedural and substantive. The latter, which Doral is claiming, “prohibits the state to take unreasonable, arbitrary or capricious decisions on property interests of citizens or their freedoms.” Hernandez v Trinidad. ELA, 188 D.P.R. 828 (2013). If we look at the arguments and documents they definitely support this claim.

b) Impairment of Contractual Obligations-both constitutions prohibit the impairment of contractual obligations. This issue has been discussed several times in v Teachers Association v. ELA and Trinidad Hernandez. The state can not impair contractual obligations unless justified from the point of view of public interest and that the remedy solves or substantially lessens the problem. In the balance of interests, how allowing the Treasury Department a keep $ 229 million plus in a consolidated budget of nearly $ 30 billion remedy or lessened the economic crisis which we live? I find it hard to believe the PRSC will not grant the certification petition.

Finally, Doral asks in its application for a declaratory judgment that the December 2012 agreement and other incidental agreements be declared valid. Given the above, I think the PRSC will grant the certification and resolve the case promptly. To give an example, in the case of the Teachers Association, the lawsuit was filed on January 8, 2014, the Court designated a Special Commissioner who made ​​factual findings, there were two argumentative views on the Supreme Court and even then the case was decide on April 11 The PRSC has shown that when he wants, can move very quickly. I hope it does here. We will keep you informed.

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4 comments

  1. I’m befuddled. It seems to me that the 2012 Agreement gave Hacienda the right to annul it (among other actions), through a decree or administrative action or proceeding (among other alternatives, some of which clearly pertains to Hacienda), if and only if there was a misrepresentation of facts (among other conducts), an argument which Hacienda has “supported” (we don’t know yet the extent to which it is so) by alleging there was “deceit”[ful] information. How come then it is not within its powers its annulment, and request to follow the administrative path to clear its allegation? The safeguard embedded within the tax agreements (“will be upheld, EXCEPT…”) can’t be “letra muerta”. I don’t know of a single instance of Hacienda exerting this role in the past (at least publicly). I’m aware of the sacrosanct inportance of upholding the contracts, but I’m also very much in favor of unblemished public actions. If it only is a politically motivated manouver, it will become apparent. What’s extremely unsettling for me is to pretend that under NO circumstance, whatsoever, an alleged wrong-doing (be it the 2006 PPD’s, or the 2012’s PNP, or both) that engulfs several hundred millions of “public” funds can be corrected, because it was a “done deal”. Imagine the alternative, a Department giving away improper tax deals with impunity, and null chances for oversight. Let them fight it openly. I think the outcome will be favorable to Puerto Rico either way.

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