Dr. José S. Belaval, Inc. v. PéRez-Perdomo

• Decision Date: 18 May 2007
• Docket Number: No. 07-1240.,07-1240.
• Court: U.S. Court of Appeals — First Circuit
• Parties: 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.

488 F.3d 11

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.

No. 07-1240.

United States Court of Appeals, First Circuit.

Heard May 7, 2007.

Decided May 18, 2007.

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.

Before LYNCH, LIPEZ, and HOWARD, Circuit Judges.

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 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 defendant was 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 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.

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 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.

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.

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...