United States v. Pelullo ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
5-25-1999
USA v. Pelullo
Precedential or Non-Precedential:
Docket 96-1398
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Recommended Citation
"USA v. Pelullo" (1999). 1999 Decisions. Paper 143.
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Filed May 25, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 96-1398
UNITED STATES OF AMERICA
v.
LEONARD A. PELULLO,
Appellant
Appeal from the United States District Court
For the Eastern District of Pennsylvania
D.C. No.: 91-cr-00060
District Judge: Honorable Robert F. Kelly
Argued: January 28, 1999
Before: BECKER, Chief Judge,
SCIRICA and ROSENN, Circuit Judges.
(Filed May 25, 1999)
Richard A. Ripley (Argued)
Howrey & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2402
Allen B. Dubroff
Frank & Rosen
1835 Market Street
Suite 320
Philadelphia, PA 19103
Counsel for Appellant
Frank A. Labor, III (Argued)
Office of United States Attorney
615 Chestnut Street, Suite 1250
Philadelphia, PA 19106
Counsel for Appellee
OPINION OF THE COURT
ROSENN, Circuit Judge.
In an effort to meet this nation's changing economic and
social developments, Congress occasionally enacts
legislative enactments that are in tension with each other.
This appeal presents such a situation and a legal issue with
highly important consequences. The genesis for the appeal
is the defendant's conviction for a violation of the federal
wire fraud statute, one count of racketeering in violation of
18 U.S.C. S 1962, and a special forfeiture verdict. Based
upon the jury's conviction of the defendant, Leonard A.
Pelullo, and its special forfeiture verdict, the District Court
entered a criminal forfeiture order under 18 U.S.C.S 1963
of the defendant's personal residence as part of his
sentence.
Following the imposition of sentence, the Government
initiated an ancillary proceeding in the District Court to
adjudicate third party interests in the forfeited property.
The District Court authorized the United States Marshal
Service (Marshal Service), inter alia, to dispose of the
defendant's forfeited residence immediately at a judicial
public sale. After unsuccessful efforts to stay the sale, the
defendant filed a Chapter 11 petition in the United States
Bankruptcy Court for the Eastern District of Pennsylvania,
and anticipated that this would invoke the automatic stay
provision of the Bankruptcy Code pursuant to 11 U.S.C.
S 362. Despite actual notice of the Chapter 11filing prior to
the scheduled hour for the sale, the Government proceeded
with the public auction of the property and consummated
the sale. Subsequently, the Government obtained an ex
parte temporary protective order, later made permanent,
barring the defendant from pursuing the Chapter 11
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bankruptcy with respect to any asset forfeited to the United
States. The defendant timely appealed. We affirm.
I.
In January 1995, a jury convicted Pelullo of forty-six
counts of wire fraud in violation of 18 U.S.C. S 1341 and
one count of racketeering in violation of 18 U.S.C.S 1962.
The appeals from the criminal conviction and from the
District Court's permanent protective order were heard by
this panel contemporaneously. We affirmed the criminal
conviction on March 18, 1999. United States v. Pelullo, ___
F.3d ___ (3d Cir. 1999). The jury's special verdict under 18
U.S.C. S 1963(a) forfeited Pelullo's interest in racketeering
proceeds of $1.3 million and a Montana ranch that the jury
found Pelullo had acquired with racketeering proceeds.
In conjunction with sentencing the defendant to a term of
confinement in prison on September 14, 1995, the District
Court ordered the forfeiture of Pelullo's interest in $1.3
million of racketeering proceeds and the Montana ranch. At
the same time, the Court ordered a forfeiture of Pelullo's
interest in his residence on Brickell Avenue in Miami,
Florida as a substitute asset for the Montana ranch under
18 U.S.C. S 1963(m). The following day, the Government
commenced an ancillary forfeiture proceeding to adjudicate
third party interests in the forfeiture assets under 18
U.S.C. S 1963(l). Three days later, because Pelullo had not
made any mortgage payments due on the Miami property
since his indictment in February 1991, a Dade County,
Florida, circuit court entered a mortgage foreclosure
judgment against the property and Pelullo. The foreclosure
judgment amounted to approximately $3 million, with
accrued interest at 8% per annum. The Government, in an
effort to forestall depletion of the net equity of the property
through the accrual of additional interest and taxes,
applied for and obtained an order to sell publicly the Miami
property before completion of the ancillary forfeiture and
the entry of a final order.
On October 11, 1995, the District Court authorized the
Marshal Service to sell the property by interlocutory sale.
None of the parties who had asserted an interest in the
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asset, despite notice, opposed the interlocutory sale, which
the Marshal Service scheduled for November 17, 1995.
However, on November 8, 1995, Pelullo appealed to this
court to stay the sale; we denied the stay.
On November 17, 1995, just prior to the scheduled sale,
Pelullo filed a Chapter 11 petition in the United States
Bankruptcy Court for the Eastern District of Pennsylvania
and served notice thereof upon the Marshal Service by
facsimile immediately prior to the scheduled hour for sale.
Despite notice of the filing of the petition and of the
automatic stay provision of the Bankruptcy Code, 1 the
Government proceeded with the public sale on advice of the
United States Attorney's office that the automatic stay
provision of the Bankruptcy Code did not apply to this
criminal forfeiture proceeding. The mortgage holder
purchased the property for a sum less than the outstanding
mortgage balance.
Pelullo, asserting that the Miami property was an asset of
his debtor's estate and that the sale violated the automatic
stay of the Bankruptcy Code, thereupon filed a motion for
contempt against the Marshal Service in the bankruptcy
court. The Government requested that the motion be denied
and simultaneously applied to the District Court for a
protective order under 18 U.S.C. S 1963(e). The District
Court entered a protective order barring Pelullo and his
counsel from pursuing his bankruptcy case with respect to
any asset ordered forfeited to the Government. On April 25,
1996, the District Court made the temporary protective
order permanent. Pelullo timely appealed to this court. Title
to the Miami residence has been transferred by a Marshal's
deed to a Florida corporation designated by the former
mortgage holder; the principals of the corporation are also
principals of the mortgage holder.
_________________________________________________________________
1. The automatic stay provision of the United States Bankruptcy Code is
codified under 11 U.S.C. S 362. The filing of a petition in the bankruptcy
court pursuant to Section 362(a) ordinarily automatically acts as a
specific and definite order of the bankruptcy court to restrain creditors
from continuance of judicial process or collection efforts against the
debtor.
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II.
The crucial question on appeal is whether Pelullo's filing
of the bankruptcy petition effectively divested the District
Court of jurisdiction over the forfeited assets and
transferred jurisdiction over them to the bankruptcy court
subject to the automatic stay, thus immobilizing the
Government's enforcement of the criminal forfeiture
sentence imposed by the District Court. Pelullo states the
issue in these terms: whether the District Court erred in
granting a protective order prohibiting him from including
his residence as an asset in his pending Chapter 11 case
because that asset was listed as a substitute in the order
of forfeiture dated September 11, 1995 and "in failing to
recognize pursuant to Sections 362(a)(1) and 362(b)(5) of
the Bankruptcy Code that sale of appellant's residence was
automatically stayed by the filing of the Chapter 11
petition."
A.
A threshold question, however, that confronts us is one
raised by the Government. It contends that we lack
appellate jurisdiction because the order appealed from is
not a final order under 28 U.S.C. S 1291 or the collateral
order doctrine. Moreover, the Government asserts that the
order is not appealable as an interlocutory injunction. It
further notes that appellant's reliance upon 28 U.S.C.
S 1334 for appellate jurisdiction is erroneous. That section,
it argues, confers subject matter jurisdiction over
bankruptcy cases upon the District Court but does not
create jurisdiction in courts of appeals.
Under 28 U.S.C. S 1291, our jurisdiction is limited, with
certain exceptions, to "appeals from all final decisions of
the District Courts of the United States." As the
Government aptly argues, the protective order at issue
here, however, is an interlocutory order of the District
Court.
Our scope of review of questions relating to jurisdiction is
plenary. Caplan v. Fellheimer Eichen Braverman & Kaskey,
68 F.3d 828,834 (3d Cir. 1995). This court's decision in
United States v. Nicolet, Inc., 857 F.2d 202 (3d Cir. 1988),
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in which we were faced with a similar jurisdictional
question, is instructive. In Nicolet, the Government initiated
proceedings under the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA)
against defendant Nicolet to recover funds expended to
clean-up an environmental site that had once been owned
by Nicolet. Id. at 203. At some point during the District
Court proceedings, Nicolet filed a Chapter 11 petition for
reorganization in the bankruptcy court. Id. Initially, the
District Court stayed the proceedings pursuant to Section
362 but, later, vacated the stay and permitted the
Government to pursue collection. Id. Nicolet appealed the
vacation of the stay to this court. Id.
On appeal, we observed that Nicolet had appealed an
interlocutory order that effectively served to lift the
automatic stay of the Chapter 11 proceedings as to the
government. Id. at 204. Although the stay of a civil action
generally is interlocutory and not appealable, in bankruptcy
cases, lifting the automatic stay and a denial of relief from
the stay are appealable. Id. at 203. We further noted that
if a motion to lift the stay had been brought in the
bankruptcy court and had been granted by that court, this
court's appellate jurisdiction to review that order would
have been a certainty, as it would have been squarely
within the grant of authority under 28 U.S.C. S 158(d). Id.2
However, because Nicolet appealed from a District Court
order that involved a bankruptcy case but not an order of
the bankruptcy court itself, we concluded that 28 U.S.C.
S 1291, not 28 U.S.C. S 158(d), was available as a predicate
for jurisdiction. Id. at 204.
We reasoned that the order at issue was so "inextricably
intertwined with a pending bankruptcy proceeding," the
more liberal appellate standards of finality applicable to
appeals of bankruptcy court orders were appropriate. Id.
We noted that in In re Amatex Corp., 755 F.2d 1034, 1039
(3d Cir. 1985), the concept of "finality" of an order in the
_________________________________________________________________
2. Section 158(d) provides that "[t]he courts of appeals shall have
jurisdiction of appeals from all final decisions, judgments, orders, and
decrees entered [by the district courts in reviewing orders of bankruptcy
judges]"
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bankruptcy context was best described as a "functional
approach." Nicolet, 857 F.2d at 204. We therefore concluded
in Nicolet that for purposes of an appeal of a District Court
order in a "bankruptcy setting," our appellate jurisdiction
under Section 1291 "mirrors that under section 158(d)." Id.
In the case at bar, the District Court's order impacted
significantly on a bankruptcy matter. The order also had
the effect of lifting the automatic stay as to the Florida
property, preventing the bankruptcy court from exercising
jurisdiction over it, and authorizing the immediate sale of
that property. Moreover, once the District Court made its
order permanent, the order conclusively determined
Pelullo's interest in the Florida property and enjoined him
from even litigating his claims to it in the bankruptcy court.
As in the District Court's order in Nicolet,"no further work
need be done by the District Court" in the instant case as
to the Florida property. Id. at 206. The order had all of the
attributes of finality.
Accordingly, in light of the functional and pragmatic
disposition enunciated in Nicolet, we conclude that the
District Court's order is subject to appellate review.
B.
Turning now to the merits of the case, Pelullo claims that
the District Court erred in granting the Permanent
Protective Order. He submits that, once he filed a
bankruptcy petition, the Miami property came under the
jurisdiction of the bankruptcy court. Pelullo therefore
argues that, because of the automatic stay provision, 11
U.S.C. S 362(a), the District Court was barred from
proceeding with respect to the Miami property. He further
contends that, even if it might have been appropriate to
permit the forfeiture proceedings to continue, that decision
should have been left to the bankruptcy court. Pelullo
therefore concludes that the Marshal Service conducted no
bona fide sale of the Miami property on November 17, 1995,
and that the protective orders, temporary and permanent,
were erroneous and an abuse of the Court's discretion.
On the other hand, the Government contends that
Pelullo's Miami property never became subject to the
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jurisdiction of the bankruptcy court, and therefore the
Protective Orders were entirely appropriate. In particular,
the Government contends that the Forfeiture Order entered
on September 14, 1995, divested Pelullo of any interest in
the Miami property. Accordingly, Pelullo havingfiled his
bankruptcy petition on November 17, 1995, neither the
automatic stay provision, S 362(a), nor any other provision
of the Bankruptcy Code, applied to the property. The
Government further notes that, under RICO, the District
Court has full power to protect its jurisdiction over the
forfeited property:
Following the entry of an order declaring property
forfeited, the court may, upon the application of the
United States, enter such appropriate restraining
orders or injunctions, require the execution of
satisfactory performance bonds, appoint receivers,
conservators, appraisers, accountants, or trustees, or
take any other action to protect the interest of the
United States in the property forfeited.
18 U.S.C. S 1963(e). Thus, the Government contends, the
Protective Orders were perfectly legitimate. Because we
conclude that the Forfeiture Order divested Pelullo of any
interest in the property, we agree with the Government.
Section 1963 provides for criminal forfeiture proceedings
against defendants to forfeit the proceeds of racketeering
activities. Under RICO, the defendant's interest in certain
kinds of property, such as property traceable to the
proceeds of racketeering activity, is automatically forfeited
to the Government upon the entry of a judgment that the
property is of that type. See 18 U.S.C.S 1963(a). Under the
doctrine of "relation back," the defendant's interest in
property forfeited under S 1963(a) is divested at the time the
racketeering activity upon which the conviction is
predicated occurs. The defendant's interest in the property
is vested in the government nunc pro tunc the time at which
the criminal activity occurred. See S 1963(c) ("All right, title
and interest in property described in subsection (a) vests in
the United States upon the commission of the act giving
rise to the forfeiture under this section."). In addition, if the
Government proves that the racketeering activity created a
certain amount of proceeds, but not all of that amount is
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traceable to specific property of the defendant, the
Government can then seek forfeiture of other assets of the
defendant not related to the racketeering activities, which
are referred to as "substitute assets." See 18 U.S.C.
S 1963(m). Simultaneous with Pelullo's sentencing, the
District Court granted the Government's motion to
substitute the Miami property for the Montana ranch and
ordered its forfeiture.
The Order of Forfeiture acts to divest the defendant of
any remaining interest in the property. The forfeiture can
only take effect upon the entry of a judicial order directing
the forfeiture. See Shelden v. United States, 7 F.3d 1022,
1027 (Fed. Cir. 1993) ("Title to forfeited property transfers
to the United States upon entry of a judgment of forfeiture."
(citing United States v. Stowell, 133 U.S. 1, 17 (1890))). We
reach our conclusion based on a consideration of the
structure of criminal forfeiture proceedings, precedent on
related subjects, and a close reading of the terms of the
Forfeiture Order itself. Several aspects of the procedural
structure of criminal forfeiture proceedings provide support
for our holding. A criminal forfeiture proceeds in two steps.
First, in conjunction with the criminal trial of the
defendant, the factfinder determines whether the defendant
had an interest in the allegedly forfeitable property that
arose from his illegal activities. If so, the district court
enters an order of forfeiture with respect to that property at
the time of sentencing. In the second stage of proceedings,
termed the ancillary proceeding, people other than the
defendant may assert their interests in the property. See 18
U.S.C. S 1963(i). Following the ancillary proceeding, the
district court may amend the order of forfeiture in
accordance with its determination of the issues raised
therein. See S 1963(i)(1).
Two particular aspects of this procedural structure are
particularly significant. First, the order of forfeiture entered
at sentencing is a final order with respect to the defendant
from which he can appeal. See, e.g., United States v.
Bennett, 147 F.3d 912 (9th Cir. 1998); United States v.
Christunas, 126 F.3d 765 (6th Cir. 1997); United States v.
Libretti, 38 F.3d 523 (10th Cir. 1994), affd , 516 U.S. 29
(1995). This rule is predicated on the assumption that a
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forfeiture order conclusively determines all of the
defendant's interest in the forfeited property. See
Christunas, 126 F.3d at 768 ("A preliminary forfeiture order
terminates all issues presented by the defendant and leaves
nothing to be done except enforce by execution what has
been determined."). Second and concomitantly, the
defendant generally has no standing to participate in the
ancillary proceeding that takes place after the forfeiture
order is entered at sentencing. See Bennett, 147 F.3d at
914; Christunas, 126 F.3d at 769; see also Libretti, 38 F.3d
at 527 (district court has no jurisdiction to consider
defendant's claims to property once defendant hasfiled
notice of appeal from order of forfeiture entered at
sentencing). This lack of standing is set forth specifically in
the statute, which provides that "any person, other than the
defendant," may file a petition to initiate an ancillary
proceeding to adjudicate his claim to the forfeited property.
18 U.S.C. S 1963(i)(2). This lack of standing suggests that
the defendant no longer has an interest in the property.
This conclusion is supported by the general body of law
relating to forfeiture orders.
Finally, the September 1995 Forfeiture Order declares, in
a straightforward manner: "[I]t is further ordered and
decreed pursuant to 18 U.S.C. S 1963(m) that the interests
of the defendant Leonard A. Pelullo in the following
properties shall be forfeited to the United States of America:
The real property located at 3031 Brickell Avenue, Miami,
Florida." To forfeit something means:
To lose, in consequence of breach of contract, neglect
of duty, or offense, some right, privilege, or property to
another or to the State. . . .
To lose an estate, a franchise, or other property
belonging to one, by the act of the law, and as a
consequence of some misfeasance, negligence, default,
or omission. It is a deprivation (that is, against the will
of the losing party), with the property either transferred
to another or resumed by the original grantor.
Black's Law Dictionary 650 (6th ed. 1990). Thus, the plain
meaning of the District Court's Forfeiture Order was that
Pelullo thereupon lost any interest he had in the Miami
property.
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Accordingly, we conclude that, as a result of the
Forfeiture Order, Pelullo no longer had any interest in the
Miami property at the time he petitioned for bankruptcy
protection. The initiation of the bankruptcy proceeding thus
could have no effect on the property, including by way of
the automatic stay provision. The automatic stay provision
and the jurisdiction of the bankruptcy courts extend in
general to the bankruptcy estate. See, e.g., 11 U.S.C.
S 362(a)(2) (automatic stay applies to "the enforcement . . .
against property of the [bankruptcy] estate of a judgment
obtained before the commencement of the [bankruptcy]
case"); 28 U.S.C. S 1334(e) ("The district court in which a
case under Title 11 is commenced or is pending shall have
exclusive jurisdiction of all the property, wherever located,
of the debtor as of the commencement of such case, and of
property of the estate."). The bankruptcy estate is
comprised of, in pertinent part, "wherever located and by
whomever held . . . all legal and equitable interests of the
debtor in property as of the commencement of the estate."
11 U.S.C. S 540(1). Since, after the Forfeiture Order was
entered, Pelullo had no remaining interest in the Miami
property, it did not become part of the bankruptcy estate.
Therefore, neither the automatic stay provision nor the
bankruptcy court's jurisdiction more generally applied to
the property, and the District Court's Protective Orders
could not conflict with Pelullo's bankruptcy proceeding and
thus were not erroneous.
Given our conclusions set forth above, we need not reach
various other issues which the parties have argued at
length. As an initial matter, we note that, since the Miami
property no longer belonged to Pelullo at the time he filed
his bankruptcy petition, the bankruptcy court had no
jurisdiction over the property. See 28 U.S.C. S 1334(e).
Accordingly, we need not consider which grant of exclusive
jurisdiction -- over RICO cases or bankruptcy cases --
takes precedence in this case. Compare 18 U.S.C. S 1963(i)
(barring filing of actions in other courts with respect to
property subject to forfeiture under RICO) with 28 U.S.C.
S 1334(e) (granting bankruptcy court exclusive jurisdiction
over property of debtor and bankruptcy estate); cf. Brock v.
Morysville Body Works, Inc., 829 F.2d 383, 385-86 (3d Cir.
1987). Similarly, since the S 362(a) automatic stay does not
11
apply at all, we need not decide whether one of the
exceptions thereto set forth in S 362(b) bars its application
in this case. Cf. Pennsylvania Dept. of Public Welfare v.
Davenport, 495 U.S. 552 (1990) (discussing applicability of
S 362(b)(1) "criminal proceeding" exception to automatic
stay); James v. Draper (In re James), 940 F.2d 46 (3d Cir.
1991) (discussing S 362(b)(4) & (5) "police power" exceptions
to automatic stay).
III.
In summary, we conclude that the order appealed from is
an appealable order and that we have jurisdiction to hear
Pelullo's appeal. On the merits, we hold that the District
Court committed no error in granting temporary and
permanent protective orders prohibiting Pelullo from
including his Miami residence as an asset in his Chapter
11 proceeding.
Accordingly, the order of the District Court will be
affirmed. Costs taxed against the appellant.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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