Doral Financial blames collapse on tax fight and poor economy

Doral Financial Corp., the holding company for Puerto Rico’s second-largest mortgage lender until regulators seized the unit last month, filed for bankruptcy with a plan to sell its assets.

Subsidiary Doral Bank was taken over by the Federal Deposit Insurance Corp. on Feb. 27, brought down by historical accounting errors, a recession in Puerto Rico and an appeals court ruling that the commonwealth’s Treasury didn’t owe the lender a $229 million tax refund.

The failed bank, with deposits of $4.1 billion and assets of $5.9 billion, had 26 branches in Puerto Rico, Florida and New York, which were transferred to other banks as part of the FDIC action. The holding company had sought to expand in the continental U.S. in recent years, to no avail.

The Chapter 11 filing late Wednesday in New York, where the San Juan-based company has an office, bookends a long-running court battle in which Doral sought the return of taxes it claimed to have paid on fake earnings from 1998 to 2005. Puerto Rico, hobbled by a lingering debt crisis, challenged a court ruling in favor of the bank and emerged the winner.

Economic woes in Puerto Rico made it impossible for Doral to recover from the tax fight and the accounting problems that led to it, the company said in court filings.

“Unlike the rest of the United States, Puerto Rico’s economy failed to recover and remains in recession,” Carol Flaton, Doral’s chief restructuring officer, said in a filing.

Puerto Rico Justice Department officials had long argued that Doral misrepresented facts under a 2012 tax agreement, negating the company’s claim for the refund.

The FDIC estimated that the failure would cost the insurance fund $749 million.

The bank’s home office was raided in December by the Federal Bureau of Investigation in a search for evidence related to what the agency said were several probes. The agents collected computers and documents, FBI officials said at the time. The bureau gave no indication the raid was linked to the tax fight.

Doral hadn’t filed financial reports for almost a year after the FDIC barred the bank from including in its Tier 1 capital the tax refund it sought.

The holding company said it would seek court permission to sell its insurance unit to Anglo-Puerto Rican Insurance Corp. for $10.8 million as soon as possible to preserve the value of the business before it loses too many customers.

Doral also said it would seek court approval of a tentative settlement with Fannie Mae, the U.S. government-backed finance company, to return a “significant” portion of $44 million Doral pledged as collateral under a deal to repurchase certain defaulted mortgages. Doral pledged too much collateral under the accord, according to the filing.

The company’s Chapter 11 filings included several standard bankruptcy requests, including one for access to a Doral Financial Citibank NA account holding $20.5 million.

Doral’s problems started in the early 2000s, when the company and its units engaged in numerous derivative transactions “that resulted in illusory, non-cash earnings,” according to court papers. The deals triggered accounting errors, misstated earnings and an overpayment of taxes, according to the filings.

After changing its financial reporting and accounting procedures, and restating earnings, Doral’s market value plunged $4.5 billion, triggering class-action lawsuits and a U.S. Securities and Exchange Commission fine, according to court papers.

The company said it sought to diversify earnings by expanding into New York and Florida while Puerto Rico was mired in recession. By the end of 2013, Doral’s U.S. loans totaled about $2.7 billion, and the U.S. emerged as the lender’s primary source of growth, it said.

Doral’s last financial statements, as of Dec. 31, 2013, listed assets of $8.49 billion and liabilities totaling $7.76 billion. Liabilities listed in bankruptcy papers include $170 million in notes and $37.3 million in bonds.

The holding company’s stock last traded on March 11 for 16 cents in the over-the-counter market. In the past three years, the high for the parent company’s stock was $38.40 on April 24, 2012. A year ago, the shares went for about $13.