Municipality of Mayaguez v. Corporacion Para El Desarrollo Del Oeste, Inc.
726 F.3d 8
1st Cir.2013Background
- In the early 1980s Mayagüez conveyed parcels purchased with HUD CDBG funds to CPDO via “Deed 91,” which required compliance with applicable federal laws and HUD regulations and allowed Mayagüez to demand return of property for nonuse.
- Relations deteriorated after 1993; HUD audited Mayagüez in 1997, found misuse of CDBG funds, and Mayagüez ultimately repaid roughly $4 million and HUD closed the audit in 2009.
- Mayagüez sued CPDO in 2006 under Puerto Rico law, alleging CPDO’s mismanagement violated incorporated HUD regulations and thus breached Deed 91 (accounting, improper uses, bidding/procurement irregularities).
- CPDO repeatedly moved to dismiss for lack of federal-question jurisdiction under 28 U.S.C. § 1331; the district court denied jurisdictional dismissal, tried the case, and ruled for CPDO on the merits, dismissing Mayagüez’s claims with prejudice.
- On appeal, the First Circuit sua sponte reexamined federal-question jurisdiction in light of Supreme Court decisions (Empire Health Assurance, Gunn) and requested supplemental briefing.
- The First Circuit concluded the federal issue was not sufficiently “substantial” to confer federal-question jurisdiction, abrogated its prior COFECC jurisdictional reasoning, vacated the judgment, and remanded with instructions to dismiss without prejudice for lack of subject matter jurisdiction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the state-law breach-of-contract claim “arises under” federal law (§ 1331) because it requires interpreting HUD regulations incorporated into Deed 91 | The contract necessarily raises disputed federal questions about CPDO’s compliance with HUD regs; those federal questions are substantial because they concern federal funds and program rules | The federal issues are not substantial; the dispute is fact-bound and HUD’s role was peripheral; jurisdiction is lacking; also HUD’s audit closure removed any live federal issue | Court held no federal-question jurisdiction: federal issue not "substantial" under Grable/Gunn; dismiss for want of jurisdiction |
| Whether COFECC controls (First Circuit precedent finding jurisdiction in a similar municipal vs. development-corp dispute) | COFECC establishes that adherence to federal regulatory requirements and involvement of federal funds suffice for federal jurisdiction | COFECC is no longer controlling after Empire Health Assurance and Gunn; COFECC’s footnote overstated the federal interest | Court abrogated COFECC’s jurisdictional holding and declined to treat it as controlling |
| Whether closing HUD’s audit during litigation extinguished any federal issue so jurisdiction (if it once existed) is gone | N/A in district-court briefing; CPDO argued closing the administrative audit removed any live federal controversy | CPDO: HUD audit closure eliminated the federal issue; no longer a federal question to resolve | Court did not decide whether substantiality can be lost mid-litigation; it resolved jurisdictional issue based on the complaint and found no substantial federal issue there |
| Whether CPDO breached Deed 91 (merits) | Mayagüez: CPDO mismanaged funds and violated HUD rules, breaching the deed | CPDO: it complied with HUD rules; Mayagüez obstructed CPDO’s ability to respond to HUD; factual disputes exist | Court did not reach the merits on appeal; district-court merits judgment vacated and case remanded for dismissal without prejudice for lack of subject-matter jurisdiction |
Key Cases Cited
- Grable & Sons Metal Prods. v. Darue Eng’g & Mfg., 545 U.S. 308 (establishes narrow category where state-law claims "arise under" federal law when a disputed federal issue is necessarily raised and substantial)
- Empire Health Assurance, Inc. v. McVeigh, 547 U.S. 677 (refused federal jurisdiction over contract-derived reimbursement claim despite federal agency involvement)
- Gunn v. Minton, 568 U.S. 251 (clarifies the four-part test for embedded federal issues and stresses substantiality to the federal system)
- Municipality of San Juan v. Corporación Para El Fomento Económico de la Ciudad Capital (COFECC), 415 F.3d 145 (1st Cir. 2005) (prior First Circuit decision holding similar municipal/developer dispute presented federal-question jurisdiction; abrogated here)
- One & Ken Valley Housing Group v. Maine State Housing Auth., 716 F.3d 218 (1st Cir. 2013) (contrast case where federal-question jurisdiction was appropriate because the dispute raised a pure federal legal issue with broad implications for a federal program)