Of the Sixth Circuit, sitting by designation. *

United States Court of Appeals

For the First Circuit

No. 05-2854

DR. JOSÉ S. BELAVAL, INC.,

Plaintiff/Appellant,

RIO GRANDE COMMUNITY HEALTH CENTER, INC.; 

CONCILIO DE SALUD INTEGRAL DE LOIZA, INC.,

Plaintiffs,

v.

HON. ROSA PERÉZ-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 O. LEAVITT, Secretary, United States

Department of Health and Human Services,

Defendants.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jay A. García-Gregory, U.S. District Judge]

Before

 Lynch, Circuit Judge,

Siler, Senior Circuit Judge, *

and Lipez, Circuit Judge.
Robert A. Graham, with whom James L. Feldesman and Feldesman

Tucker Leifer Fidell LLP were on brief, for appellant.

Eduardo A. Vera-Ramírez, with whom Courtney R. Carroll,

Landrón & Vera LLP, Roberto Sanchez-Ramos, Secretary of Justice,

and Salvador Antonetti-Stutts, Solicitor General, were on brief,

for appellee.

October 2, 2006
 At the commencement of this action, the Secretary of Health 1

was Johnny Rullan. He has since been substituted as a defendant by

the current Secretary, Rosa Peréz-Perdomo.

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LYNCH, Circuit Judge. This appeal stems from a lawsuit

filed on June 6, 2003 by three community health centers in Puerto

Rico: Rio Grande Community Health Center, Inc. ("Rio Grande"),

Concilio de Salud Integral de Loiza, Inc. ("Loiza"), and Dr. José

S. Belaval, Inc. ("Belaval"). Belaval is the sole appellant in

this action.

In their suit, the three health centers alleged that the

defendant, the Secretary of the Department of Health of Puerto

Rico, had failed to make required payments to them under the 1

federal Medicaid statute. See 42 U.S.C. § 1396a. They sought

declaratory and prospective injunctive relief. On November 1,

2004, after reviewing and adopting a magistrate judge's Report and

Recommendation, the district court issued an order granting

plaintiffs a preliminary injunction. By its terms, the order

required the defendant to implement, by November 30, 2004, a

"wraparound" payment system that complied with the Medicaid law

"for the purpose of providing such payments thereunder to

plaintiffs." In addition to giving the defendant a deadline to put

in place a system to make the required payments, the order also

provided that "[o]n or before December 10, 2004, defendant shall

pay to the appearing plaintiffs which are currently operating all

pending supplemental payments for 2004." The second part of the
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order thus insured that the appearing plaintiffs would not be

irreparably harmed in the interim by the defendant's failure to

make payments. Belaval was an appearing plaintiff who was

operating at the time the order was entered, and as such was within

the terms of the November 1, 2004 order.

On March 7, 2005, the district court issued another

order, this one clarifying how the defendant was to structure its

wraparound payments in light of our decision in Rio Grande

Community Health Center, Inc. v. Rullan, 397 F.3d 56 (1st Cir.

2005), a case which affirmed earlier relief that had been granted

specifically to Loiza. Payments under the clarified formula were

required to begin with the amounts due from the fourth quarter of

2004, and were to continue until Puerto Rico established its

compliance with federal law. The order also specifically mentioned

Belaval and "reiterate[d]" the court's finding that Puerto Rico's

failure to pay Belaval was in violation of the federal Medicaid

statute. The court ordered the defendant to "establish forthwith

a provisional payment system to alleviate the shortfall."

After this second order, on March 22, 2005 the defendant

filed a motion seeking to demonstrate that it was operating in

compliance with the order's method of calculation. The plaintiffs

opposed this motion and argued there was no compliance. As to

Belaval in particular, no payments had yet been made, so it opposed

the motion.
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The magistrate judge issued a Report and Recommendation

on June 24, 2005 in which he found that the defendant was not fully

in compliance because Puerto Rico was using an incorrect method of

calculating payments. Turning to the payments owed to Belaval

specifically, the magistrate judge found that the March 7, 2005

order required only future payments be made to Belaval, and that it

did not address past payment obligations. Thus the defendant's

failure to pay Belaval up to that point did not mean that it was

out of compliance with the March 7, 2005 order. However, the

magistrate judge explicitly reserved judgment on whether any

payment was owed to Belaval under the November 1, 2004 order, and

on whether the defendant was in compliance with that order.

In response, Belaval asked the court to find the

defendant in contempt of the November 1, 2004 preliminary

injunction. On September 26, 2005, the magistrate judge agreed

that the November 1, 2004 order had established Belaval's right to

payment for the months from March 31, 2004 onward. The defendant's

failure to pay Belaval was thus not in compliance with that order.

The magistrate judge held the motion for contempt in abeyance, and

he gave the defendant Secretary several weeks to come into

compliance.

On October 6, 2005, the district court adopted the

magistrate judge's June 24 and September 26 Reports and

Recommendations finding that the defendant was generally not in
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compliance. The district court also agreed that the November 1,

2004 order entitled Belaval to payments from at least the second

quarter of 2004 onwards. As did the magistrate judge, the district

court held the motion for contempt in abeyance despite the finding

of non-compliance. The district court's decision to hold the

contempt motion in abeyance is not at issue in this appeal.

What is appealed is a separate portion of that October 6,

2005 order which modified the November 1, 2004 preliminary

injunction as to Belaval. Parts of that original injunction had

required that Belaval be paid "all pending supplemental payments

for 2004" by December 10, 2004, and had also required that the

defendant set up a federally compliant payment system, under which

Belaval would receive what were then future payments, to be

operational by November 30, 2004. The district court modified that

original obligation, saying that "in light of the confusion"

created by the magistrate judge's June 24, 2005 Report and

Recommendation, "wraparound payments to Belaval shall be made

prospectively beginning in the third quarter of Fiscal Year 2005."

This modification of the November 1, 2004 preliminary

injunction was entirely sua sponte and was not on motion of the

defendant, who had sought no such relief. The order modifying the

injunction was also entered without prior notice to the parties

that the court was considering a modification to the November 1st

order and without an opportunity to be heard. The effect of this
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unilateral change by the district court was to relieve the

defendant from making several quarters' worth of payments that

previously had been ordered. Counsel for Belaval represented at

oral argument that these payments would have totaled approximately

1.25 to 1.5 million dollars. Belaval appeals from this

modification of the earlier preliminary injunction. We reverse

this portion of the October 6, 2005 district court order and

reinstate the payment obligation to Belaval originally imposed by

the November 1, 2004 order.

I.

The defendant's initial response to the appeal is to

argue that this court lacks jurisdiction to hear an appeal from a

significant modification of a preliminary injunction. The argument

is without merit.

Under 28 U.S.C. § 1292(a), we may hear an interlocutory

appeal from a district court order "granting, continuing,

modifying, refusing or dissolving injunctions, or refusing to

dissolve or modify injunctions, except where a direct review may be

had in the Supreme Court." While § 1292(a) is to be "strictly

construed," Sierra Club v. Marsh, 907 F.2d 210, 214 (1st Cir.

1990), the reviewing court must "look to the practical effect of

the order rather than its verbiage," Morales Feliciano v. Rullan,

303 F.3d 1, 6 (1st Cir. 2002). The portion of the order appealed

from clearly modifies the November 1, 2004 preliminary injunction
 At oral argument the defendant belatedly suggested that we 2

lack jurisdiction under § 1292(a)(1) because Belaval had made no

showing of irreparable injury. See Morales Feliciano, 303 F.3d at

6. Even if the argument were not waived, it is without merit. Of

necessity, the original preliminary injunction rested on a finding

that Belaval would suffer irreparable injury if the injunction were

not granted and the 2004 payments were not made. Moreover, on

September 23, 2005, Belaval filed documents with the district court

indicating that it was on the brink of financial ruin due to the

defendant's failure to make the statutorily required payments. In

any event, in this case the "serious, perhaps irreparable,

consequence[s]," Carson v. Am. Brands, Inc., 450 U.S. 79, 84 (1981)

(quoting Baltimore Contractors, Inc. v. Bodinger, 348 U.S. 176, 181

(1955)) (internal quotation marks omitted), are apparent from the

size of the contested payments and the defendant's delay in making

them.

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as to several quarters' worth of payments -- payments said to be

worth over a million dollars. By the terms of the November 1

preliminary injunction, these sums were to have been paid to

Belaval almost two years ago and are still unpaid. The district

court's modification affects a substantial sum of money and is

clearly "jurisdictionally significant," id. at 7; it does much more

than merely affect the conduct or progress of litigation.2

II.

The district court cited no authority for its decision to

modify the injunction in the manner it did. No party had sought

the relief the court ordered, nor had any party presented any

arguments as to why the injunction should be modified to

substantially diminish the payments that Belaval was entitled to as

a result of the November 1, 2004 injunction. Belaval was given no

notice or opportunity to object to this modification.
 One circuit has held that the district court has the 3

inherent authority to act in this manner if it complies with Rule

59(e)'s ten-day limit. See Burnam v. Amoco Container Co., 738 F.2d

1230, 1232 (11th Cir. 1984); see also Sun-Tek Indus., Inc. v.

Kennedy Sky Lites, Inc., 848 F.2d 179, 181 (Fed. Cir. 1988)

(applying Eleventh Circuit procedural law). But cf. 12 Moore's

Federal Practice -- Civil § 59.33 (2006) (stating only that

"[a]rguably" the court has this authority). The order in this

case, coming some eleven months after the injunction was entered,

did not comply with the ten-day limit.

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There is an initial question whether the district court

had authority to act on its own initiative. This circuit has not

decided whether a district court may act sua sponte to modify an

injunction under Fed. R. Civ. P. 59(e) or Fed. R. Civ. P. 60(b).

The plain text of Rule 59(e) does not speak expressly to that

question. And whether Rule 60(b) bars a court from sua sponte 3

issuing relief from judgment is an issue that has divided the

circuits. Compare Eaton v. Jamrog, 984 F.2d 760, 762 (6th Cir.

1993) (holding that Rule 60(b) bars sua sponte relief), and Dow v.

Baird, 389 F.2d 882, 884-85 (10th Cir. 1968) (same), with Fort

Knox Music Inc. v. Baptiste, 257 F.3d 108, 111 (2d Cir. 2001)

(finding that Rule 60(b) permits sua sponte relief), Kingvision

Pay-Per-View, Ltd. v. Lake Alice Bar, 168 F.3d 347, 351-52 (9th

Cir. 1999) (same), McDowell v. Celebrezze, 310 F.2d 43, 44 (5th

Cir. 1962) (same), and United States v. Jacobs, 298 F.2d 469, 472

(4th Cir. 1961) (suggesting that sua sponte relief may be

appropriate under Rule 60(b) in some cases).
 The defendant, citing Hammond v. United States, 786 F.2d 8 4

(1st Cir. 1986), argues that a preliminary injunction cannot be a

protected property interest because it is not yet a final judgment.

This argument misreads Hammond, which stands only for the

proposition that when the legislature changes the underlying law

during the pendency of litigation, there is no constitutional

violation because the litigant's property interest does not "vest"

until there has been a final judgment. See id. at 12. In the case

at hand, there has been no change in the underlying substantive

law, and thus no need to determine the point at which any property

right "vested." Defendant's reading of Hammond is also squarely in

tension with the Supreme Court's recognition in Logan that a cause

of action is a protected property interest. See Logan, 455 U.S. at

428-29.

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We need not decide these issues here. Even assuming that

a court may on its own motion substantially modify the terms of a

preliminary injunction to the substantial detriment of a party's

property interest, and do so beyond the ten-day limit of Rule

59(e), both the structure of the federal rules and the

constitutional guarantee of due process require that a court not do

so without giving prior notice to the parties and an opportunity

for them to be heard. See Fed. R. Civ. P. 59, 60(b); Logan v.

Zimmerman Brush Co., 455 U.S. 422, 428-31 (1982); Memphis Light,

Gas & Water Div. v. Craft, 436 U.S. 1, 11-12 (1978); see also

Logan, 455 U.S. at 429 ("The Court traditionally has held that the

Due Process Clauses protect civil litigants who seek recourse in

the courts . . . ."); cf. Kingvision, 168 F.3d at 352 (finding that

a federal court judgment constitutes a protected property

interest). The district court was required to act in accord with

the temporal and substantive standards set by Rules 59 and 60 for

modifications. The district court could not deprive Belaval of 4
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this property interest without notice and an opportunity to be

heard. See Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 546

(1985). Neither of those was given.

Our ruling does not foreclose the district court, on

remand and after notice and a hearing (and assuming it has

authority), from considering whether the preliminary injunctive

relief granted on November 1, 2004 may be modified under the usual

criteria for such modifications. For example, under Rule 60(b)(1)

the defendant would have to show "mistake, inadvertence, surprise,

or excusable neglect," as those terms are used within the rule.

Under Rule 60(b)(5) the defendant would have to show that "it is no

longer equitable that the judgment should have prospective

application," and that there has been the kind of "significant

change" in circumstances that the Rule requires. See, e.g., United

States v. Kayser-Roth Corp., 272 F.3d 89, 95-96 (1st Cir. 2001).

Under Rule 60(b)(6), the defendant would have to show that there

are "exceptional circumstances justifying extraordinary relief."

Ahmed v. Rosenblatt, 118 F.3d 886, 891 (1st Cir. 1997). For any

relief under Rule 60(b), the defendant would have to show that a

"motion [was] made within a reasonable time," and in the case of

Rule 60(b)(1) that a motion was made "not more than one year after

the judgment, order, or proceeding was entered or taken."

We vacate and reverse the appealed-from portion of the

October 6, 2005 order insofar as it purports to modify the November
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1, 2004 preliminary injunction's payment obligation to Belaval.

Costs are awarded to Belaval.