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. e du/thir dc ir c uit_1999/143Filed 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 AppellantFrank 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 economi c and social developments, Congress occasionally enacts legislative enactments that are in tension with eac h other. This appeal presents such a situation and a legal i ssue with highly important consequences. The genesis for the appeal
is the defendant's conviction for a violation of th e federal wire fraud statute, one count of racketeering in vi olation of 18 U.S.C. S 1962, and a special forfeiture verdict. Based upon the jury's conviction of the defendant, Leonar d A. Pelullo, and its special forfeiture verdict, the Di strict Court
entered a criminal forfeiture order under 18 U.S.C. S 1963 of the defendant's personal residence as part of hi s
sentence.

Following the imposition of sentence, the Governmen t initiated an ancillary proceeding in the District C ourt to adjudicate third party interests in the forfeited p roperty.
The District Court authorized the United States Mar shal Service (Marshal Service), inter alia, to dispose o f the defendant's forfeited residence immediately at a ju dicial 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 Pennsy lvania, and anticipated that this would invoke the automati c stay provision of the Bankruptcy Code pursuant to 11 U.S .C. S 362. Despite actual notice of the Chapter 11filin g prior to the scheduled hour for the sale, the Government pro ceeded with the public auction of the property and consumm ated the sale. Subsequently, the Government obtained an ex parte temporary protective order, later made perman ent, barring the defendant from pursuing the Chapter 11

2bankruptcy with respect to any asset forfeited to t he 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 13 41 and one count of racketeering in violation of 18 U.S.C. S 1962. The appeals from the criminal conviction and from t he District Court's permanent protective order were he ard by this panel contemporaneously. We affirmed the crimi nal conviction on March 18, 1999. United States v. Pelu llo, ___ F.3d ___ (3d Cir. 1999). The jury's special verdict under 18 U.S.C. S 1963(a) forfeited Pelullo's interest in ra cketeering proceeds of $1.3 million and a Montana ranch that t he jury found Pelullo had acquired with racketeering procee ds.

In conjunction with sentencing the defendant to a t erm of confinement in prison on September 14, 1995, the Di strict
Court ordered the forfeiture of Pelullo's interest in $1.3 million of racketeering proceeds and the Montana ra nch. At the same time, the Court ordered a forfeiture of Pe lullo's
interest in his residence on Brickell Avenue in Mia mi,
Florida as a substitute asset for the Montana ranch under 18 U.S.C. S 1963(m). The following day, the Governm ent commenced an ancillary forfeiture proceeding to adj udicate third party interests in the forfeiture assets unde r 18 U.S.C. S 1963(l). Three days later, because Pelullo had not made any mortgage payments due on the Miami propert y since his indictment in February 1991, a Dade Count y, Florida, circuit court entered a mortgage foreclosu re judgment against the property and Pelullo. The fore closure judgment amounted to approximately $3 million, with accrued interest at 8% per annum. The Government, i n an effort to forestall depletion of the net equity of the property through the accrual of additional interest and taxe s, applied for and obtained an order to sell publicly the Miami property before completion of the ancillary forfeit ure and the entry of a final order.

On October 11, 1995, the District Court authorized the Marshal Service to sell the property by interlocuto ry sale. None of the parties who had asserted an interest in the

3asset, despite notice, opposed the interlocutory sa le, which

the Marshal Service scheduled for November 17, 1995

. However, on November 8, 1995, Pelullo appealed to t his court to stay the sale; we denied the stay.

On November 17, 1995, just prior to the scheduled s ale, Pelullo filed a Chapter 11 petition in the United S tates Bankruptcy Court for the Eastern District of Pennsy lvania and served notice thereof upon the Marshal Service by facsimile immediately prior to the scheduled hour f or 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 t his criminal forfeiture proceeding. The mortgage holder purchased the property for a sum less than the outs tanding mortgage balance.

Pelullo, asserting that the Miami property was an a sset of
his debtor's estate and that the sale violated the automatic stay of the Bankruptcy Code, thereupon filed a moti on for contempt against the Marshal Service in the bankrup tcy court. The Government requested that the motion be denied and simultaneously applied to the District Court fo r a protective order under 18 U.S.C. S 1963(e). The Dis trict Court entered a protective order barring Pelullo an d his counsel from pursuing his bankruptcy case with resp ect to any asset ordered forfeited to the Government. On A pril 25, 1996, the District Court made the temporary protect ive order permanent. Pelullo timely appealed to this co urt. Title to the Miami residence has been transferred by a Ma rshal's deed to a Florida corporation designated by the for mer mortgage holder; the principals of the corporation are also principals of the mortgage holder.

___________________________________________________ ______________

1. The automatic stay provision of the United State s Bankruptcy Code is codified under 11 U.S.C. S 362. The filing of a pet ition in the bankruptcy court pursuant to Section 362(a) ordinarily automat ically 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.

4II.

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 bankruptc y court subject to the automatic stay, thus immobilizing th e Government's enforcement of the criminal forfeiture sentence imposed by the District Court. Pelullo sta tes the
issue in these terms: whether the District Court er red in granting a protective order prohibiting him from in cluding his residence as an asset in his pending Chapter 11 case because that asset was listed as a substitute in th e order of forfeiture dated September 11, 1995 and "in fail ing to recognize pursuant to Sections 362(a)(1) and 362(b) (5) of the Bankruptcy Code that sale of appellant's reside nce was automatically stayed by the filing of the Chapter 1 1 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 f rom is
not a final order under 28 U.S.C. S 1291 or the col lateral order doctrine. Moreover, the Government asserts th at the order is not appealable as an interlocutory injunct ion. It further notes that appellant's reliance upon 28 U.S .C. S 1334 for appellate jurisdiction is erroneous. Tha t section, it argues, confers subject matter jurisdiction over bankruptcy cases upon the District Court but does n ot 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 deci sions of
the District Courts of the United States." As the Government aptly argues, the protective order at is sue here, however, is an interlocutory order of the Dis trict

Court.

Our scope of review of questions relating to jurisd iction is plenary. Caplan v. Fellheimer Eichen Braverman & Ka skey, 68 F.3d 828,834 (3d Cir. 1995). This court's decisi on in United States v. Nicolet, Inc., 857 F.2d 202 (3d Ci r. 1988),

5in which we were faced with a similar jurisdictiona l

question, is instructive. In Nicolet, the Governmen t 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 o wned by Nicolet. Id. at 203. At some point during the Di strict Court proceedings, Nicolet filed a Chapter 11 petit ion for reorganization in the bankruptcy court. Id. Initial ly, the District Court stayed the proceedings pursuant to S ection 362 but, later, vacated the stay and permitted the Government to pursue collection. Id. Nicolet appeal ed 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 civi l action generally is interlocutory and not appealable, in b ankruptcy cases, lifting the automatic stay and a denial of r elief from the stay are appealable. Id. at 203. We further not ed that if a motion to lift the stay had been brought in th e 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 square ly within the grant of authority under 28 U.S.C. S 158 (d). Id.2 However, because Nicolet appealed from a District C ourt order that involved a bankruptcy case but not an or der 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 "inextri cably intertwined with a pending bankruptcy proceeding," the more liberal appellate standards of finality applic able 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 ord er in the

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2. Section 158(d) provides that "[t]he courts of ap peals shall have jurisdiction of appeals from all final decisions, j udgments, orders, and decrees entered [by the district courts in reviewin g orders of bankruptcy judges]"

6bankruptcy context was best described as a "functio nal

approach." Nicolet, 857 F.2d at 204. We therefore c oncluded in Nicolet that for purposes of an appeal of a Dist rict Court order in a "bankruptcy setting," our appellate juri sdiction under Section 1291 "mirrors that under section 158( d)." Id.

In the case at bar, the District Court's order impa cted significantly on a bankruptcy matter. The order als o had the effect of lifting the automatic stay as to the Florida property, preventing the bankruptcy court from exer cising jurisdiction over it, and authorizing the immediate sale of that property. Moreover, once the District Court ma de its order permanent, the order conclusively determined Pelullo's interest in the Florida property and enjo ined him from even litigating his claims to it in the bankru ptcy court. As in the District Court's order in Nicolet,"no fur ther 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 pragmat ic disposition enunciated in Nicolet, we conclude that the District Court's order is subject to appellate revi ew.

B.

Turning now to the merits of the case, Pelullo clai ms 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 there fore argues that, because of the automatic stay provisio n, 11 U.S.C. S 362(a), the District Court was barred from proceeding with respect to the Miami property. He f urther contends that, even if it might have been appropria te to permit the forfeiture proceedings to continue, that decision should have been left to the bankruptcy court. Pelu llo
therefore concludes that the Marshal Service conduc ted no bona fide sale of the Miami property on November 17 , 1995, and that the protective orders, temporary and perma nent,
were erroneous and an abuse of the Court's discreti on.

On the other hand, the Government contends that Pelullo's Miami property never became subject to th e

7jurisdiction of the bankruptcy court, and therefore the

Protective Orders were entirely appropriate. In par ticular,
the Government contends that the Forfeiture Order e ntered on September 14, 1995, divested Pelullo of any inte rest in the Miami property. Accordingly, Pelullo havingfile d his bankruptcy petition on November 17, 1995, neither t he automatic stay provision, S 362(a), nor any other p rovision of the Bankruptcy Code, applied to the property. Th e Government further notes that, under RICO, the Dist rict Court has full power to protect its jurisdiction ov er the forfeited property:

Following the entry of an order declaring p roperty forfeited, the court may, upon the applicati on of the United States, enter such appropriate restra ining orders or injunctions, require the execution of satisfactory performance bonds, appoint rece ivers, conservators, appraisers, accountants, or tr ustees, or take any other action to protect the interes t 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. Becaus e we conclude that the Forfeiture Order divested Pelullo of any interest in the property, we agree with the Governm ent.

Section 1963 provides for criminal forfeiture proce edings against defendants to forfeit the proceeds of racke teering activities. Under RICO, the defendant's interest in certain kinds of property, such as property traceable to th e 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). U nder the doctrine of "relation back," the defendant's intere st in property forfeited under S 1963(a) is divested at t he 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 gi ving rise to the forfeiture under this section."). In ad dition, if the Government proves that the racketeering activity cr eated a certain amount of proceeds, but not all of that amo unt is

8traceable to specific property of the defendant, th e

Government can then seek forfeiture of other assets of the defendant not related to the racketeering activitie s, 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 defendan t of any remaining interest in the property. The forfeit ure can only take effect upon the entry of a judicial order directing the forfeiture. See Shelden v. United States, 7 F.3 d 1022, 1027 (Fed. Cir. 1993) ("Title to forfeited property transfers to the United States upon entry of a judgment of fo rfeiture." (citing United States v. Stowell, 133 U.S. 1, 17 (1 890))). We
reach our conclusion based on a consideration of th e structure of criminal forfeiture proceedings, prece dent on related subjects, and a close reading of the terms of the Forfeiture Order itself. Several aspects of the pro cedural structure of criminal forfeiture proceedings provid e support for our holding. A criminal forfeiture proceeds in two steps. First, in conjunction with the criminal trial of th e defendant, the factfinder determines whether the de fendant had an interest in the allegedly forfeitable proper ty that arose from his illegal activities. If so, the distr ict court enters an order of forfeiture with respect to that property at the time of sentencing. In the second stage of proc eedings, termed the ancillary proceeding, people other than the defendant may assert their interests in the propert y. See 18 U.S.C. S 1963(i). Following the ancillary proceedin g, the district court may amend the order of forfeiture in
accordance with its determination of the issues rai sed therein. See S 1963(i)(1).

Two particular aspects of this procedural structure are particularly significant. First, the order of forfe iture 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 State s v. Christunas, 126 F.3d 765 (6th Cir. 1997); United St ates v. Libretti, 38 F.3d 523 (10th Cir. 1994), affd , 516 U.S. 29 (1995). This rule is predicated on the assumption t hat a

9forfeiture order conclusively determines all of the

defendant's interest in the forfeited property. See Christunas, 126 F.3d at 768 ("A preliminary forfeit ure order terminates all issues presented by the defendant an d 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 for feiture 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 consi der defendant's claims to property once defendant hasfi led notice of appeal from order of forfeiture entered a t sentencing). This lack of standing is set forth spe cifically in the statute, which provides that "any person, other than the defendant," may file a petition to initiate an anci llary proceeding to adjudicate his claim to the forfeited property. 18 U.S.C. S 1963(i)(2). This lack of standing sugge sts that the defendant no longer has an interest in the prop erty. This conclusion is supported by the general body of law relating to forfeiture orders.

Finally, the September 1995 Forfeiture Order declar es, in a straightforward manner: "[I]t is further ordered and decreed pursuant to 18 U.S.C. S 1963(m) that the in terests
of the defendant Leonard A. Pelullo in the followin g 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 contrac t, neglect of duty, or offense, some right, privilege, or property to
another or to the State. . . .

To lose an estate, a franchise, or other pr operty 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, a gainst the will of the losing party), with the property eith er transferred to another or resumed by the original granto r.

Black's Law Dictionary 650 (6th ed. 1990). Thus, th e plain meaning of the District Court's Forfeiture Order wa s that Pelullo thereupon lost any interest he had in the M iami
property.

10Accordingly, we conclude that, as a result of the

Forfeiture Order, Pelullo no longer had any interes t in the Miami property at the time he petitioned for bankru ptcy protection. The initiation of the bankruptcy procee ding thus could have no effect on the property, including by way of the automatic stay provision. The automatic stay pr ovision and the jurisdiction of the bankruptcy courts exten d in general to the bankruptcy estate. See, e.g., 11 U.S .C. S 362(a)(2) (automatic stay applies to "the enforce ment . . . against property of the [bankruptcy] estate of a ju dgment 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 shal l have exclusive jurisdiction of all the property, whereve r 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 interes ts of the debtor in property as of the commencement of the es tate." 11 U.S.C. S 540(1). Since, after the Forfeiture Ord er was entered, Pelullo had no remaining interest in the M iami property, it did not become part of the bankruptcy estate. Therefore, neither the automatic stay provision nor the bankruptcy court's jurisdiction more generally appl ied to the property, and the District Court's Protective O rders could not conflict with Pelullo's bankruptcy procee ding 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 t he Miami property no longer belonged to Pelullo at the time he filed his bankruptcy petition, the bankruptcy court had n o jurisdiction over the property. See 28 U.S.C. S 133 4(e). Accordingly, we need not consider which grant of ex clusive 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 res pect to property subject to forfeiture under RICO) with 28 U.S.C. S 1334(e) (granting bankruptcy court exclusive juri sdiction 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

11apply at all, we need not decide whether one of the

exceptions thereto set forth in S 362(b) bars its a pplication in this case. Cf. Pennsylvania Dept. of Public Welf are v. Davenport, 495 U.S. 552 (1990) (discussing applicab ility of S 362(b)(1) "criminal proceeding" exception to auto matic 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 fro m is an appealable order and that we have jurisdiction t o hear Pelullo's appeal. On the merits, we hold that the D istrict Court committed no error in granting temporary and permanent protective orders prohibiting Pelullo fro m including his Miami residence as an asset in his Ch apter 11 proceeding.

Accordingly, the order of the District Court will b e 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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