Municipality of Mayagüez v. Corporación Para El Desarrollo Del Oeste, Inc.

• Decision Date: 07 August 2013
• Docket Number: No. 11–2241.,11–2241.
• Citation: 726 F.3d 8
• Parties: MUNICIPALITY OF MAYAGÜEZ, Plaintiff, Appellant, v. CORPORACIÓN PARA EL DESARROLLO DEL OESTE, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

726 F.3d 8

MUNICIPALITY OF MAYAGÜEZ, Plaintiff, Appellant,

v.CORPORACIÓN PARA EL DESARROLLO DEL OESTE, INC., Defendant, Appellee.

No. 11–2241.

United States Court of Appeals, First Circuit.

Aug. 7, 2013.

Nicolás Nogueras–Cartagena, with whom Jely Cedeño Richiez and Nogueras Law & Associates were on brief, for appellant.

Bámily López Ortiz, for appellee.

Before LYNCH, Chief Judge, SELYA and LIPEZ, Circuit Judges.

LIPEZ, Circuit Judge.

This lengthy and heated dispute involves a contract executed nearly thirty years ago by the Municipality of Mayagüez and a local development corporation, Corporación Para el Desarrollo del Oeste (“CPDO”). After many years of deteriorating relations between the two parties, Mayagüez filed the instant suit, alleging that CPDO's failure to comply with several regulations issued by the Department of Housing and Urban Development (“HUD”) amounted to a breach of their contract under the laws of Puerto Rico.

After review, we conclude that Mayagüez's commonwealth law claim does not “arise under” federal law within the meaning of 28 U.S.C. § 1331. Therefore, we decline to reach the merits of plaintiff's appeal, vacate the judgment below, and remand to the district court with instructions that the plaintiff's claim be dismissed without prejudice for want of subject matter jurisdiction.

I.

A. Facts

To determine whether subject matter jurisdiction exists, we take the following well-pleaded facts from the complaint. See Pejepscot Indus. Park, Inc. v. Me. Cent. R.R. Co., 215 F.3d 195, 197 (1st Cir.2000); see also Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 10–11, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983) (discussing the well-pleaded complaint rule and noting that “a defendant may not remove a case to federal court unless the plaintiff's complaint establishes that the case ‘arises under’ federal law”); Bernhard v. Whitney Nat'l. Bank, 523 F.3d 546, 551 (5th Cir.2008) (noting that it is a “long-established axiom” that “a federal court has original or removal jurisdiction only if a federal question appears on the face of the plaintiff's well-pleaded complaint”).

In the early 1980s, Mayagüez purchased several parcels of land with money it had received as part of a Community Development Block Grant (“CDBG”) administered by HUD.¹ Mayagüez and CPDO then executed an instrument known as “Deed 91,” under which Mayaguez ceded the parcels to CPDO with the understanding that the land would be used for a project called “Villa Sultanita,” to be developed in accordance with HUD's CDBG program guidelines and regulations.

Deed 91 states in relevant part ²:

SEVENTH: The Transferee Corporation ... meets the requirements of section Five Hundred Seventy point two, zero, four (24 C.F.R. 570.204) of the Act known as the Housing and Community Development Act of nineteen seventy-four,

....

NINTH: It is an indispensable condition for the transfer herein that the Transferee use the transferred property solely and exclusively for the construction and sale of housing, commercial areas, and any other infrastructure needed. Said project shall be known as “VILLA SULTANITA,” shall have a public purpose, and shall comply at all times with applicable state and federal laws, rules, and regulations. Said activity shall be carried out by the non-profit transferee. The parties also agree that THE TRANSFEROR ... may unilaterally, and at its sole discretion require the following from the transferee:

....

B) The return of the transferred property if the transferor determines that it will not be used, or has not been used, for the specific purposes for which the transfer has been made;

....

TENTH: The Transferee will diligently and scrupulously make sure that the “Villa Sultanita Project” is carried out as per applicable state and federal laws, ....

Development of Villa Sultanita proceeded amicably enough for several years, until a new mayor of Mayagüez was elected in 1993. The new administration and CPDO were immediately at odds, and the relationship between the parties rapidly deteriorated, with each accusing the other of obstructing progress on the Villa Sultanita project. CPDO eventually sued Mayagüez in the commonwealth courts in October 1995. Mayagüez counter-sued. That litigation lasted for nearly a decade, until both parties agreed to dismiss their claims in 2004.

At the same time as the relationship between the parties imploded, HUD's Office of the Inspector General became concerned that federal money was being mismanaged in Mayagüez. In 1997, HUD conducted an independent audit of Mayagüez's CDBG block grant administration, revealing that millions of dollars in CDBG block grant funds had been misused in Mayagüez.

The CDBG program's authorizing statute and regulations allow HUD to demand reimbursement from the grant recipient regardless of whether a sub-recipient, such as CPDO, was actually responsible for the mismanagement. See42 U.S.C. § 5311; 24 C.F.R. § 570.910. Exercising this authority, HUD demanded that Mayagüez repay approximately $4 million in misused CDBG funds and barred the city from receiving further HUD development grants. Mayagüez repaid HUD and then filed the instant complaint in 2006, seeking compensation and damages from CPDO.³

In the complaint, Mayagüez alleged that CPDO was actually responsible for the mismanagement of the Villa Sultanita development uncovered in the Inspector General's audit. According to Mayagüez's theory of the case, in violating several HUD regulations, CPDO breached its promise in Deed 91 that the development of Villa Sultanita would “comply at all times with applicable state and federal laws.” Specifically, Mayagüez alleged that CPDO's management of Villa Sultanita violated several HUD regulations by: 1) failing to keep adequate accounting and auditing systems in place as required by 24 C.F.R. §§ 84.21, .52; 2) using funds for purposes other than those authorized under 24 C.F.R. § 570.309; 3) failing to comply with bid and competition requirements under 24 C.F.R. § 84.44; and 4) failing to comply with procurement requirements under 24 C.F.R. § 84.44.⁴

B. District Court Proceedings

From the outset of this case, there were serious concerns about the existence of federal jurisdiction. Early in the proceedings, CPDO filed a motion under Federal Rule of Civil Procedure 12(b)(1) alleging that Mayagüez had failed to state a claim arising under the laws of the United States to establish federal jurisdiction under 28 U.S.C. § 1331. The district court referred the matter to a magistrate judge, who concluded that federal-question jurisdiction in this case was proper under our decision in Municipality of San Juan v. Corporación Para El Fomento Económico De La Ciudad Capital, 415 F.3d 145 (1st Cir.2005) (“COFECC ”), a factually similar case concerning a dispute between a municipality and a local development corporation over the misuse of HUD grants.

The district court accepted the magistrate judge's recommendation, and acrimonious pre-trial proceedings continued for several years, culminating in a week-long bench trial in 2010. CPDO argued at trial that it had not violated the terms of Deed 91 because it had always managed the Villa Sultanita project in line with HUD guidelines, and any adverse findings in the HUD audit were actually the result of Mayagüez's refusal to communicate in any form with CPDO. According to CPDO, HUD gave Mayagüez the opportunity to “sanitize” the audit findings if the city could provide information indicating that the grant money had been spent in compliance with the CDBG program purposes and guidelines. CPDO claimed that it could have provided this information to HUD, but was prevented from doing so by the mayor of Mayagüez. Indeed, CPDO argued that the mayor's antipathy for CPDO was so great that he chose to repay nearly $4,000,000 in funds rather than work cooperatively with CPDO.

In addition to its arguments on the merits, CPDO again moved to dismiss at trial for lack of subject matter jurisdiction. CPDO offered evidence that in the years since Mayagüez filed its complaint, HUD had administratively closed its audit against Mayagüez. According to CPDO, once the HUD investigation against Mayagüez was closed and could no longer be challenged, no federal issue remained. The district court disagreed, concluding that Mayagüez's agreement to repay HUD did not resolve the question of whether CPDO had breached its responsibilities as a sub-grantee, which were memorialized in Deed 91. In the district court's opinion, resolving the dispute between CPDO and Mayagüez continued to “turn[ ] heavily upon determining whether federal regulations, as incorporated into the contract between the parties, were complied with.” Mun. of Mayagüez v. Corporación Para el Desarrollo del Oeste, 824 F.Supp.2d 289, 294 n. 1 (D.P.R.2011) (emphasis supplied).

At the same time that the district court denied CPDO's motion to dismiss for want of jurisdiction, however, the court also concluded that Mayagüez had failed to demonstrate that CPDO breached any provisions of Deed 91. As such, the court dismissed Mayagüez's claims with prejudice. Mayagüez filed this appeal, challenging the district court's decision on the merits.

After reviewing the parties' initial merits briefs in this case, we identified a significant question concerning our jurisdiction. In particular, we believed that our jurisdictional holding in COFECC, on which the magistrate judge relied, might no longer be good law in light of the Supreme Court's intervening opinions in Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 126 S.Ct. 2121, 165 L.Ed.2d 131 (2006), and Gunn v. Minton, ––– U.S. ––––, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013). To our surprise, neither party raised this thorny jurisdictional issue in its merits briefs before us. Therefore, given our unflagging obligation to determine our own jurisdiction sua sponte, see Am. Airlines, Inc. v. Cardoza–Rodriguez, 133 F.3d 111, 115 n. 1 (...