Doral Financial in San Juan, Puerto Rico, still faces an uncertain future despite prevailing in a legal dispute over a $230 million tax refund.
The victory should strengthen the $8 billion-asset company's position in any settlement negotiations with Puerto Rico's Treasury Department, industry observers said. Still, a judge's recent ruling is unlikely to immediately improve Doral's distinction as being significantly undercapitalized.
"Unless Puerto Rico writes a check and the funds are transferred quickly, then it isn't clear a favorable decision for the bank will solve their capital problems," said Bert Ely of Ely & Co., adding that the Federal Deposit Insurance Corp., which is monitoring Doral's capital issues, will likely take into account Puerto Rico's own financial woes.
Doral's capital position became precarious earlier this year when the Puerto Rican government invalidated an agreement designed to give the company a refund for overpaid taxes. The government provided several reasons for its decision, including a claim that the agreement was reached through misrepresentation.
Doral filed a lawsuit in an effort to secure the refund. On Friday, Puerto Rico's Court of First Instance affirmed that the government must pay Doral the money over the next five years.
"There can't be any question that Doral's tax agreement is effective, that it is binding and that Hacienda owes Doral over $229 million," Matthew McGill, a lawyer at Gibson, Dunn & Crutcher who represented Doral, said during a conference call Monday. "It is a complete vindication."
Puerto Rico will "pursue all legal options available to appeal the court's decision," Melba Acosta Febo, the territory's Treasury Secretary, said in a Friday statement.
"The Department of the Treasury maintains that it is correct in its contention regarding the nullity of the 2012 Agreement, and that Doral's allegations are unfounded," Acosta Febo added. "Our commitment has always been to protect the interests of the people of Puerto Rico, and we will continue to do so."
Puerto Rico's Treasury Department did not provide anyone to comment beyond Acosta Febo's statement.
The FDIC determined earlier this year that Doral could no longer count the funds toward its Tier 1 capital calculation, demanding that the company develop a plan to address the issue. Doral has since been selling off assets and looking at other options to shore up capital.
Since the Puerto Rican government is expected to appeal the decision, it is unlikely that the FDIC will immediately reverse course and allow Doral to count the funds towards its capital, said Craig Miller, a partner at Manatt, Phelps & Phillips. A final resolution could be months off.
So far, the case has been fast tracked, and Doral is hopeful that would continue, McGill said.
Puerto Rico's strained financial condition complicates matters. The territory's debt was downgraded to junk status earlier this year, raising concerns about possible default.
"There is some risk because the Puerto Rican government is in dire straits," Miller said. "The government may not be able to pay a judgment, or won't be able to pay the whole thing. I don't think Doral will be able to count this as real capital at this stage."
McGill said he is hopeful Doral would be able to count the money towards its capital since the judgment should "resolve some concerns" over the agreement's legality. Still, McGill noted that he couldn't "speak to what the FDIC will do."
The FDIC declined to discuss the case, stating that the agency doesn't comment on open and operating institutions.
The decision, however, could strengthen Doral's position in any settlement talks with Puerto Rico, industry experts said. The parties were close to a settlement in August, and McGill said Doral remains open to the possibility.
A settlement could help resolve the matter more quickly, allowing Doral to receive payment faster. Once again, the money would probably need to exchange hands quickly to help Doral, Ely said.
The dispute has been contentious at times, with Doral waging a public relations campaign, likely in hopes of swaying public opinion to its side, Miller said. The company warned in its lawsuit of potential dire consequences, including "the loss of a major lender in the Puerto Rico housing market" and 1,000 lost jobs if it wasn't repaid by the government.
"You can get to the point where you can't sit down with the other side, but that is rare," Miller said. "Ultimately, good business minds can put together a good business decision that neither side may be happy with but they will feel satisfied. At the end of the day, Doral knows that a settlement could put them in a better position and help their investors, their customers and their depositors."