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 SánchezRamos, Secretary of Justice, and Salvador Antonetti-Stutts,

Solicitor General, were on brief for appellee.

May 18, 2007
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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.
 The actual deposit did not occur until December 22, 2006, 1

and it came only after the defendant sought additional extensions.

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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.
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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
 Defendant briefly speculates that if another entity had 2

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.

 Defendant also briefly asserts, without any citation to any 3

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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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
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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.