United States Court of Appeals
For the First Circuit
No. 07-1240
DR. JOSÉ S. BELAVAL, INC.,
Plaintiff, Appellant,
RIO GRANDE COMMUNITY HEALTH CENTER, INC.; CONCILIO DE SALUD
INTEGRAL DE LOIZA, INC. (CSILO),
Plaintiffs,
v.
ROSA PÉREZ-PERDOMO,
Secretary, Department of Health of
the Commonwealth of Puerto Rico,
Defendant, Appellee,
COMMONWEALTH OF PUERTO RICO; UNITED STATES DEPARTMENT OF HEALTH
AND HUMAN SERVICES; MICHAEL LEAVITT, Secretary, United States
Department of Health and Human Services,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Gustavo A. Gelpí, U.S. District Judge]
Before
Lynch, Lipez, and Howard,
Circuit Judges.
Robert A. Graham, with whom James L. Feldesman, Feldesman
Tucker Leifer Fidell LLP and Ignacio Fernandez de Lahongrais were
on brief, for appellant.
Francisco J. Amundaray and Mercado & Soto, P.S.C. on brief for
Municipality of San Juan, amicus curiae.
Luis A. Rodriguez-Muñoz, with whom Eduardo Vera-Ramírez,
Eileen Landrón-Guardiola, Landrón & Vera, LLP, Roberto Sánchez-
Ramos, Secretary of Justice, and Salvador Antonetti-Stutts,
Solicitor General, were on brief for appellee.
May 18, 2007
LYNCH, Circuit Judge. This case is part of a continuing
saga of Puerto Rico's attempts to avoid paying money owed to a
medical provider under federal Medicaid law. Plaintiff Dr. José S.
Belaval, Inc. is a federally-qualified health center ("FQHC") under
the federal Medicaid statute. Federal law entitles Belaval to
certain payments from Puerto Rico, see 42 U.S.C. § 1396a(bb), and
when Puerto Rico failed to set up a system for making those
payments, Belaval successfully obtained a preliminary injunction in
2004 requiring Puerto Rico to do so prospectively. Much of the
background behind this case is set out in our two earlier opinions
pertaining to this litigation. See Dr. José S. Belaval, Inc. v.
Pérez-Perdomo, 465 F.3d 33 (1st Cir. 2006) (reinstating an
injunction that required payment to Belaval and that had been
erroneously modified); Rio Grande Cmty. Health Ctr., Inc. v.
Rullan, 397 F.3d 56 (1st Cir. 2005) (affirming an order of relief
requiring prospective payment to one of Belaval's co-plaintiffs).
The Commonwealth's third appearance before us stems from
the Puerto Rico Supreme Court's decision in Municipality of San
Juan v. Board of the José S. Belaval Community Health Center, Inc.,
No. CC-2005-716 (P.R. Oct. 10, 2006). In that decision, the Puerto
Rico Supreme Court determined that Belaval had been operating its
facilities without a valid contract with its landlord, the
Municipality of San Juan. The Commonwealth sought to use this
decision as a basis for avoiding its obligation to make the
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federally required payments. The federal district court decided
that Belaval lacked "clean hands," and the court deprived Belaval
of over a year's worth of payments it had been owed under the
earlier injunction. The district court erred in its application of
the unclean hands doctrine and in the relief it granted the
Commonwealth. We reverse and remand to the district court.
I.
We recount only the key points from the history of this
litigation, supplemented with the facts that arose after our
October 2, 2006 decision in Belaval.
Because of Puerto Rico's failure to make the statutorily
required Medicaid payments, three FQHCs filed suit in June 2003
seeking prospective injunctive relief from the federal district
court. Belaval, the sole appellant now before us, was one of the
three FQHC plaintiffs. The defendant was the Secretary of the
Department of Health of the Commonwealth of Puerto Rico.
On November 1, 2004, the district court adopted a
magistrate judge's report and recommendation, and it granted the
plaintiffs a preliminary injunction. Under the terms of the
injunction, the defendants were required (among other things) to
make quarterly "wraparound" payments starting from the second
quarter of 2004. Several months later, we issued our decision in
Rio Grande, which pertained to a similar injunction previously
issued for one of Belaval's co-plaintiffs. We rejected the
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Commonwealth's arguments that it was improper for a federal court
to issue such an injunction. See Rio Grande, 397 F.3d at 68-75.
Yet by August 12, 2005, Puerto Rico still had failed to
make a single payment to Belaval, and so on that date Belaval asked
the district court to issue an order to show cause why the
defendant Secretary should not be held in contempt. The magistrate
judge issued the order, and then after receiving the defendant's
response, issued a report and recommendation finding that the
defendant was not in compliance with the November 1, 2004 order.
The magistrate judge also acknowledged that Belaval's August 12
motion requested that defendant be held in contempt, and the judge
recommended that this request be held in abeyance so that the
defendant could be given several weeks to comply with the
injunction.
In an opinion issued October 6, 2005, the district court
adopted the key parts of the magistrate judge's report and
recommendation. But the district court also sua sponte modified
the preliminary injunction so that it would only take effect
beginning with the third quarter of 2005. This erroneous sua
sponte modification relieved the defendant of several quarters'
worth of payments. When Belaval took an interlocutory appeal, we
reversed this modification because, inter alia, it had been made
without providing notice and a hearing for Belaval. See Belaval,
465 F.3d at 37-38. Our Belaval opinion issued on October 2, 2006.
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The next day, and in light of our decision, the district
court (under a different judge to whom the case had been assigned)
released a two-part order. First, the court ordered Belaval to
submit, by October 18, 2006, a memorandum with supporting evidence
explaining how much it was owed under the terms of the original
injunction. Second, the court ordered the Secretary to respond to
Belaval's filing by October 30, 2006. Belaval timely submitted its
memorandum and accompanying evidence. However, the Secretary did
not respond by the required date. Thus, on October 31, 2006, the
district court ordered the defendant to pay Belaval $6,772,549, and
further ordered the defendant to deposit this amount with the Clerk
of Court by November 9, 2006.
On November 8, 2006, the defendant asked for an extension
of time to deposit the required funds, and also filed a motion for
reconsideration of the court's October 31 order. Most of the
motion was geared towards arguments that the $6.7 million figure
was too high, that more discovery was needed to determine the
correct amount, and that in any event a hearing was needed on
whether the district court should reinstate the injunction
modification that had been imposed prior to our decision in
Belaval. The motion also briefly noted that the Puerto Rico
Supreme Court had, on October 10, 2006, issued an (apparently
unpublished) opinion in a case about a landlord-tenant dispute
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between Belaval and the Municipality of San Juan (the "San Juan
opinion").
As that opinion recounts, San Juan owns the physical
structure, and the equipment, at the location where Belaval had
been providing its health services. Since 1986, Belaval had leased
its space from the municipality, but the lease expired on June 30,
2002. Belaval nonetheless continued to operate and provide medical
services at that location, beyond the period of occupancy under the
terms of the lease. After unsuccessfully attempting to evict
Belaval, San Juan filed suit against Belaval in the Puerto Rico
Court of First Instance. The municipality sought a declaratory
judgment that there was "no contract or valid title that would
allow [Belaval] to continue operating" the facilities, and it also
sought damages. The Court of First Instance issued a partial
declaratory judgment that the contract between the parties had
expired on June 30, 2002. The Puerto Rico Supreme Court upheld
that partial judgment on appeal, pointing out that because this was
a government contract with a municipality, Puerto Rico law required
any contract to be in writing, which precluded Belaval from arguing
that there had been an implicit renewal of the agreement. That is
all that the case decided. No assessment of damages was made, and
the case was remanded to the Court of First Instance to continue
proceedings.
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Back in federal court, on November 13, 2006, the district
court denied the Secretary's motion for reconsideration, pointing
out that the Secretary's arguments should have been raised before
the filing deadline had passed. However, the court did grant the
requested extension of time to deposit the funds (although it
expressed some frustration with the defendants). It also directed
the parties to discuss the effect of the San Juan opinion -- if any
-- on the payments owed to Belaval. The court further ordered that
San Juan be given notice in case it wished to try to intervene in
the case, and the court indicated that once the Secretary in fact
paid the funds to the court, those funds would remain with the
court pending further order. The Secretary did eventually deposit
the funds.1
Perhaps prompted by the district court's order, San Juan
filed a motion to intervene on December 11, 2006. San Juan alleged
that Belaval owed it over $5 million, and it asked the federal
court to order the attachment of $5,276,127.06 out of the funds to
be deposited with the federal court. The district court ordered
all parties to show cause why Belaval's funds should not be
attached as requested, and deposited with the Court of First
Instance. The parties filed their responses on December 20, 2006.
1
The actual deposit did not occur until December 22, 2006,
and it came only after the defendant sought additional extensions.
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The same day, and reacting to the district court's
earlier order from November 13, the defendant Secretary filed a
memorandum of law regarding the effect of the San Juan opinion.
Eight days later, and apparently in response to this memorandum,
the district court dismissed Belaval as a party to the case and
authorized the Commonwealth to withdraw the funds it had deposited
with the court. In a short order, and without citing any case law
or other authority (beyond the San Juan opinion), the district
court determined that Belaval "should not have been operating at
the time this federal action was commenced," and so Belaval did not
have "clean hands" to seek the equitable remedy of a preliminary
injunction. Because the court had dismissed Belaval from the
action, it denied as moot San Juan's motion to intervene. Later
that same day, the Secretary withdrew the funds she had deposited.
The December 28 order was entered without the benefit of
a response from Belaval. The next day, Belaval filed a motion for
reconsideration, and it asked that it be able to file an opposition
to the Secretary's arguments. Then, before the district court
ruled on this motion, Belaval submitted an opposition "on the
assumption the Court grants our request for reconsideration." The
district court denied the motion for reconsideration, stating that
it had considered Belaval's opposition, and that the court would
nonetheless reaffirm its earlier order.
Belaval appeals.
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II.
Belaval's appeal challenges both the substance and the
procedure of the district court's decision. We bypass Belaval's
procedural arguments.
Our merits analysis goes straight to evaluating the
district court's use of the unclean hands doctrine. Our review is
for abuse of discretion, see K-Mart Corp. v. Oriental Plaza, Inc.,
875 F.2d 907, 912 (1st Cir. 1989), and an error of law constitutes
an abuse of discretion, see Top Entm't, Inc. v. Torrejon, 351 F.3d
531, 533 (1st Cir. 2003). On the facts presented, the district
court both committed an error of law and abused its discretion in
finding that the unclean hands doctrine was applicable, and then in
dismissing Belaval's case and releasing the deposited funds.
The doctrine of unclean hands, or, more archaically, the
maxim that "[h]e who comes into equity must come with clean hands,"
Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 241
(1933), finds its roots in traditions of equity jurisprudence that
predated the merger of law and equity. See id. at 244-45; see also
Shondel v. McDermott, 775 F.2d 859, 867-68 (7th Cir. 1985)
(discussing the relationship of the doctrine to the "moralistic
. . . jurisprudence created by the Lord Chancellors of England when
the office was filled by clerics") (Posner, J.). The basic premise
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is that when a district court considers whether or not to award
equitable relief, one factor that it must consider is the extent to
which the plaintiff has engaged in certain misconduct. See Texaco
P.R., Inc. v. Dep't of Consumer Affairs, 60 F.3d 867, 880 (1st Cir.
1995).
The doctrine has limits, and not all misconduct by a
plaintiff will soil that plaintiff's hands. Among other things,
the doctrine "only applies when the claimant's misconduct is
directly related to the merits of the controversy between the
parties, that is, when the tawdry acts 'in some measure affect the
equitable relations between the parties in respect of something
brought before the court for adjudication.'" Id. (quoting
Keystone, 290 U.S. at 245). The mere fact that the "misconduct"
arises from some overlapping facts is not enough. Since
"relatively few plaintiffs are wholly free from any trace of
arguable misconduct at least tangentially related to the objective
of their suit, the right to injunctive relief . . . would have
little value if the defendant could divert the proceeding into the
byways of collateral misconduct." Shondel, 775 F.3d at 869.
In this case, there was no relationship between Belaval's
underlying suit against Puerto Rico for payment for services
provided under the federal Medicaid statute, and Belaval's Puerto
Rico law contract dispute with San Juan. Belaval's entitlement to
payment from the Secretary turns on whether or not it meets the
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definition of an FQHC, and whether or not it provides medical
services. See 42 U.S.C. §§ 1396a(bb), 1396d(l)(2)(B). There is no
dispute that Belaval was an FQHC during the relevant time, and that
Belaval provided the relevant services. The district court
nevertheless justified its actions on the ground that Belaval
"should not have been operating" at the time this federal action
commenced. That justification is error, and the two questions are
unrelated. At most, the Commonwealth's argument could be that
Belaval should not have been operating at the specific facility
owned by San Juan. But Belaval's entitlement to payment does not
turn on whether it operated at that specific facility. The fact
that Belaval may have overstayed its lease does not directly relate
to the controversy between the parties in the federal case.
The Secretary nonetheless protests that Belaval's
operation was "illegal," and defendant worries that "the
possibilities of fomenting illegal operations would be encouraged
if Belaval is allowed to receive any amount for their illegal
operation." Defendant contends that Puerto Rico will be injured if
"public funds [are] disbursed to an entity that carried on an
illegal operation."
This argument still fails to establish relatedness.
Although the Secretary says that Belaval operated "illegally," she
does not even suggest that payment to Belaval would be
impermissible under the federal Medicaid statute. Rather, her main
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point is that under Puerto Rico law, Belaval was required to have
a written contract with San Juan if it wished to have an
enforceable lease. This "illegality" is not related to Puerto
Rico's failure to make statutorily required Medicaid payments.2
There is no reason to think that these federally required payments
can be displaced by local landlord-tenant law.3
As we observed in our prior opinion, Belaval has been
pushed to "the brink of financial ruin" because of Puerto Rico's
continuing failure to make the required payments. Belaval, 465
F.3d at 36 n.2. We note that San Juan, as amicus on appeal,
opposes the relief granted the Commonwealth and supports Belaval.
III.
Notwithstanding all of the above, the Secretary appears
to make a last ditch argument that the San Juan opinion has somehow
transformed Belaval's collection efforts into attempts to obtain
retroactive monetary relief, which would then be barred by the
Eleventh Amendment. This confusing claim is without merit. As we
determined in Rio Grande, the plaintiffs in this case face no
2
Defendant briefly speculates that if another entity had
occupied San Juan's premises, it might have operated more
efficiently, thereby requiring Puerto Rico to spend less money in
reimbursements. This is sheer speculation and irrelevant.
3
Defendant also briefly asserts, without any citation to any
sources of law, that it would violate Puerto Rico law if the
Commonwealth paid funds to an entity that operated without a
written contract. "[I]ssues adverted to in a perfunctory manner,
unaccompanied by some effort at developed argumentation, are deemed
waived." United States v. Zannino, 895 F.3d 1, 17 (1st Cir. 1990).
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Eleventh Amendment bar because they have sought prospective
injunctive relief. 397 F.3d at 75-76; cf. Edelman v. Jordan, 415
U.S. 651, 668-71 (1974). Neither the fact that the Commonwealth
has managed to avoid its obligations under an injunction that was
issued prospectively, nor the fact that Belaval has been operating
without a contract with San Juan, affects this in any way.
IV.
The district court's December 28, 2006 judgment is
reversed. The case is remanded, and the district court is
instructed promptly to reinstate the case, to restore and enforce
the payment obligation created by its October 31, 2006 order, and
to supplement the payment amount from the Commonwealth with an
increase to reflect lost interest to Belaval at the appropriate
rate.
The issue of whether San Juan may seek to attach funds in
the federal proceeding after remand, even though (as we understand
it) the municipality is not yet a judgment creditor, is not before
us.
Double costs are awarded to Belaval.
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