1999 Decisions

Opinions of the United

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Precedential or Non-Precedential: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.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/143
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. 

 10 
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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