Opinion ID: 572629
Heading Depth: 2
Heading Rank: 2

Heading: Departure for Failure To Perform Forfeiture Agreement

Text: 122 The district court's final upward departure, from level 30 to level 32, was based on the defaults of Paccione and Vulpis on their obligations under the forfeiture agreement. The agreement, dated June 6, 1990, and so-ordered by the court on June 8, made Paccione and Vulpis and their respective companies jointly and severally liable to pay the government, if they were convicted under RICO, a total of $22 million in lieu of forfeitures, restitution, and fines. The agreement called for defendants to make a $4 million payment within 30 days after the agreement was signed, another $8 million within 60 days after signing, and the remaining $10 million within 90 days after signing. Thus, the entire $22 million should have been paid to the government by early September 1990. Defendants made no payments whatever. 123 The government entered default judgments against these defendants following their initial failure to perform; and, in part relying on the total default, it urged the district court not to follow PSR recommendations that Paccione and Vulpis be given sentencing credit for acceptance of responsibility. At a September 11, 1990 hearing with respect to the PSR recommendations, the court asked the government to advise it of the status of the forfeiture agreement as far as Paccione and Vulpis were concerned. 124 The government attorney stated that there had been no payments, interim or final. He stated that a few contracts for sales of assets of the Paccione and Vulpis companies had been submitted to the government, but that they would result in negligible front-end cash payments and in extended payment schedules. The government was pursuing its default judgments and had sought to take depositions to identify assets with which to satisfy the judgments. It had scheduled depositions of Paccione and Vulpis but canceled them when it was advised that both men would invoke the Fifth Amendment. It had also noticed the deposition of a proposed purchaser of certain Paccione company routes; but it was not certain whether that deposition would proceed either, since there had been a suggestion that the purchaser, a relative of Paccione by marriage, would decline to answer any question dealing with the bona fides of his purchase contract. Following the government's representations, which were not disputed, the court ordered a hearing to permit it to determine whether, in entering the forfeiture agreement, Paccione and Vulpis had intentionally defrauded the government. 125 At the September 12, 1990 hearing, the court heard testimony from witnesses called by Paccione and Vulpis, discussed in greater detail below, and heard argument from both sides. Additional information was presented at an October 3, 1990 hearing. Thereafter, addressing Paccione's attorney, the court stated, 126 [i]t is my finding that this constitutes the biggest fraud that I have any personal knowledge of on the United States Government that I have seen since I have been on the bench. And that's what we got here. A perfect fraud by you[r] client, Mr. Paccione and whoever assisted him in this misrepresentation that he would have the ability to produce $22 million by September the 8th. 127 (Sentencing Transcript, October 3, 1990, at 57.) In its sentencing opinion, the court found that both defendants intentionally entered into the $22 million agreement without bona fide purchasers in sight knowing that the businesses could not be sold within the ninety day period because of procedural requirements, 751 F.Supp. at 381, and stated as follows: 128 [P]rior to the jury's verdict, defendants entered into a Settlement Agreement with the Government that provided that if defendants were found guilty, they would pay the Government $22 million in lieu of forfeiture and fines.... Under the terms of the agreement, defendants were jointly and severally liable. In exchange defendants received a complete resolution to any financial penalties rather than allowing the jury to determine any possible forfeiture and the court any possible fines. Under the agreement, the entire $22 million was due, in full, by September 8, 1990, after two prior installment payments. Sentencing was scheduled for September 12, 1990. The agreement contemplated that the money would be raised by the selling off of the numerous waste carting businesses which Paccione and Vulpis owned and which corporations were also defendants in this case. This court approved the agreement as requested by the parties. 129 As of this date, however, defendants have not paid one penny to the Government. Defendants claim that they were unable to make the required payments because of difficulty in selling their businesses. This court concludes that defendants had difficulty selling their business, but it is also the view of this court that defendants knew full well when they entered into the agreement that they would be unable to sell their businesses within the short amount of time for which the agreement provided without prior offers to buy from bona fide purchasers. The private waste carting business is a closed market and potential buyers consist largely of friends and relatives of defendants.... The court finds and concludes that friends and relatives cooperated with defendants in not purchasing the lucrative businesses owned by defendants and allowing defendants to remain in possession. Defendants had to have been aware of the fact that there would not be any buyers when they entered into the agreement. Defendants' actions caused the question of forfeiture to be taken away from the jury and has caused this court's hands to be tied with respect to the fines. 130 In addition, there was also testimony that, even if defendants had entered into a contract with a buyer, it could take as much as two years to obtain a license from New York City's Department of Consumer Affairs.... Paccione and Vulpis, who were both involved in the carting business for many years before their trial, were aware of the procedures involved in selling a business and had to know that a sale of a business in such a short time, even with a ready, able and willing, buyer, was close to impossible. 131 .... 132 This court finds that defendants' actions constitute a fraud upon both the Government and this court because the agreement caused the issue of forfeiture to be withdrawn from the jury and prevents the court from imposing fines. 133 Id. at 379-80. 134 Finding that these were unusual circumstances not adequately considered by the Sentencing Commission, the court concluded that it had discretion to depart upwardly under § 5K2.0. It chose to add two levels because defendants' conduct was closely analogous to obstruction of justice, for which the Guidelines provide a two-level upward adjustment. See Guidelines § 3C1.1 (If the defendant willfully obstructed or impeded, or attempted to obstruct or impede, the administration of justice during the investigation, prosecution, or sentencing of the instant offense, increase the offense level by 2 levels.). The court stated that as an alternative to departure, it would have adjusted the offense level upward by two levels pursuant to § 3C1.1. 135 Paccione and Vulpis argue here that any increase in the severity of their sentences on the basis of fraud in entering the forfeiture agreement was impermissible because (a) the court erroneously placed on them the burden of proving their intent to perform, (b) the evidence did not support the court's finding that they entered into the agreement without intent to perform, and (c) it was unfair to penalize them for failing to perform while allowing the government to enforce the agreement. We reject all of their contentions. 136 First, we see no merit in defendants' suggestion that the district court misallocated the burden of proof. At the end of the September 11 hearing, following the government's representations as to nonperformance, the court stated as follows: 137 THE COURT: .... I consider at the moment that there has been a major fraud committed here on the part--with the government as the victim.... The present fraud makes pale and insignificant the fraud prosecuted in the trial, so you've got a chance to prove otherwise, and you better start tomorrow morning. 138 .... 139 THE COURT: ... I have said we are going to have a hearing on this because I believe the government has been defrauded and that the court has been misled. Now you are going to have your chance to prove otherwise. 140 (Sentencing Transcript, September 11, 1990, at 97.) We do not see in this statement or in any other an indication that the court placed the burden of proof, as contrasted with the burden of going forward, on Paccione and Vulpis. Rather, the court merely indicated that the government--having represented without contradiction that, inter alia, in the agreed 90-day period Paccione and Vulpis had not paid the government a cent, that the few contracts for sales of assets that defendants had negotiated were for small fractions of the sum due, that these would result in payouts measured not in days but in years, and that defendants and one of their prospective purchasers were invoking Fifth Amendment privilege with respect to the bona fides of these sales--had established a prima facie case. Thus, at the hearing, the court stated, I also suggested that, prima facie, that looks like a major fraud.... (Sentencing Transcript, September 12, 1990, at 126.) The government having shown facts from which intent not to pay could be inferred, the court merely informed Paccione and Vulpis that it was their burden to come forward with evidence to rebut the government's prima facie case. The court's eventual findings also reflect no misallocation of the ultimate burden of proof. The court did not at all suggest that defendants had merely failed to prove their intent to perform. Rather, it found affirmatively that defendants knew full well when they entered into the agreement that they would not perform. 141 Nor are we persuaded that the evidence was insufficient to support the court's finding that Paccione and Vulpis had entered into the forfeiture agreement without the intent to perform their obligations under it. Such a finding need be supported only by a preponderance of the evidence, see, e.g., United States v. Shoulberg, 895 F.2d 882, 886-87 (2d Cir.1990); United States v. Guerra, 888 F.2d 247, 251 (2d Cir.1989), cert. denied, 494 U.S. 1090, 110 S.Ct. 1833, 108 L.Ed.2d 961 (1990), and it may not be overturned unless clearly erroneous, 18 U.S.C. § 3742(e) (1988); see United States v. Santiago, 906 F.2d 867, 871 (2d Cir.1990); United States v. Parker, 903 F.2d 91, 103 (2d Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 196, 112 L.Ed.2d 158 (1990); United States v. Shoulberg, 895 F.2d at 884. The evidence, taken in the light most favorable to the government, included the following. 142 Paccione and Vulpis did not testify but introduced the testimony of their accountants, of attorneys who had attempted to negotiate sales of some of their companies' assets, and of court-appointed monitors who had been supervising the operations of the corporate defendants for more than a year prior to the signing of the forfeiture agreement. Principally through their attorneys, Paccione and Vulpis argued that they had expected in good faith to be able to sell enough assets to pay the government $22 million in 90 days. But the evidence was that when they entered into the forfeiture agreement, they had no purchasers waiting in the wings. Further, they indicated that they had expected to find purchasers easily and that they were surprised to find that potential purchasers were slow to agree to pay full value because once Paccione and Vulpis were convicted potential buyers believed they could get bargains because Paccione and Vulpis were required to sell to perform the forfeiture agreement. In light of defendants' extensive business experience and the facts that the agreement envisioned assets sales and that it provided for forfeiture only if defendants were convicted, the court was hardly required to credit these professions of surprise. In addition, the witnesses indicated that, as these experienced defendants would know, once a sale contract is executed, it normally takes longer than 90 days (three months to two years, according to Paccione's attorney) to obtain the necessary local regulatory approvals. 143 Defendants' witnesses also indicated that contracts for sales of carting routes normally call for very small cash down payments and very long payouts. Further, even the small monthly payments called for by the contracts they negotiated were subject to reduction if income from the sold routes decreased. Thus, the contracts that were negotiated, far from meeting defendants' obligations to pay $22 million in 90 days, provided them with no funds to pay the government anything within 90 days, provided them with little more than $1 million to pay the government upon regulatory approval of the sales, and would have dribbled the rest of the $22 million to the government over a period of many years. Along the same lines, Vulpis's father in August 1990 offered a modification of the forfeiture agreement insofar as Vulpis's presumed share was concerned: he offered to pay the government $100,000 (increased to $500,000 two days before the hearing), to be followed by payments of $100,000 per month for 12 years. 144 It is also noteworthy that though Paccione and Vulpis claimed to have believed in good faith that they would be able to pay the government the entire agreed amount within 90 days of signing the forfeiture agreement, they made little effort to show that they had had any good faith belief that they could pay the government the $4 million they agreed to pay within the first 30 days or the additional $8 million they agreed to pay within the second 30 days. Vulpis sought to show that he had attempted to obtain a $2 million mortgage during the first month after the forfeiture agreement; he apparently was surprised that the bank would not lend him $2 million when it learned he was about to go to jail. 145 The court was also entitled to believe that the testimony presented by Paccione and Vulpis as to the timing of their efforts to sell assets tended to detract from, rather than support, their protestations of good faith. Paccione, for example, had entered into four contracts that were supposed to generate money to pay half of the $22 million; of these four (which cumulatively called for front-end cash payments of only some $1.2 million), only one, for $1.5 million, was executed prior to the expiration of the 90-day period. None of the contracts had been approved by the local regulatory agency. Vulpis's attorney had negotiated toward two sales of assets; one sale apparently fell through in July. A proposed contract for the other was not sent to the purchaser until August 28; by the September 12 hearing, Vulpis's attorney had heard nothing from the purchaser and had not followed up. 146 In sum, viewed in the light most favorable to the government, the evidence showed that Paccione and Vulpis had not paid the government a penny of the sums due; that their efforts to sell assets were few and late; and that they had promised to make payments totaling $22 million within 90 days knowing that if convicted they would be under pressure to sell assets, knowing they had no purchasers lined up, knowing that most contracts are for small amounts of cash and extended payouts, and knowing that most sales require considerably longer than 90 days just to receive local regulatory approval. On the present record, we cannot say the district court's finding that Paccione and Vulpis entered into the forfeiture agreement without the intent to perform it was clearly erroneous. 147 Finally, we see no merit in defendants' argument that, because the government retained the right to enforce the forfeiture agreement, it was unfair for the court to consider their fraud as a ground for increasing their prison terms. In support of this argument, Paccione and Vulpis urge us to treat this matter strictly as a contract dispute. Though contract principles obviously are material, see Santobello v. New York, 404 U.S. 257, 92 S.Ct. 495, 30 L.Ed.2d 427 (1971), we reject defendants' argument both because the sentencing context cannot be ignored and because in fact defendants received the principal benefit of their bargain and the government did not. 148 To begin with, we note that the forfeiture agreement did not purport to affect the prison terms to which Paccione and Vulpis could be sentenced. Rather, the agreed forfeiture was to be in full satisfaction of the forfeiture penalties [for RICO conviction], as contained in paragraphs 64 through 68 of [the indictment], as well as whatever fines and restitution might otherwise be imposed pursuant to Title 18, United States Code. The cited paragraphs of the indictment sought to compel the individual defendants, inter alia, to forfeit their interests in the corporate defendants, as well as all proceeds of defendants' racketeering activity. See, e.g., 18 U.S.C. § 1963(a)(2)(A) (forfeitability of interest in RICO enterprise); id. § 1963(a)(3) (forfeitability of property constituting or derived from proceeds of racketeering activity). Had the forfeiture issue been submitted to the jury, the jury could have stripped Paccione and Vulpis of their interests in their respective companies (having a conceded value of at least $27-$53 million); or it could have determined that the proceeds of the defendants' racketeering activity included $20 million for the taking of CSX's property, plus all dumping fees charged by A & A, all dumping fees saved by the corporate defendants, and all derivative proceeds from the activity, perhaps totaling more than $10 million. Hence, jury-determined forfeitures could easily have totaled $30 million or more. Moreover, in the absence of the forfeiture agreement, the court could have ordered defendants to make restitution to CSX and the City, the victims of their racketeering activity, in addition to any RICO forfeitures. See 18 U.S.C. §§ 3663(a)(1), (a)(2), and (b)(1)(B) (court may order defendant to make restitution to RICO victim of the value of the property lost); United States v. Robilotto, 828 F.2d 940, 944, 949 (2d Cir.1987) (no Eighth Amendment violation in sentence requiring defendant both to forfeit moneys to United States and to make restitution to victim), cert. denied, 484 U.S. 1011, 108 S.Ct. 711, 98 L.Ed.2d 662 (1988); United States v. Feldman, 853 F.2d 648, 660, 663 (9th Cir.1988) (same), cert. denied, 489 U.S. 1030, 109 S.Ct. 1164, 103 L.Ed.2d 222 (1989). Thus, the monetary risks to Paccione and Vulpis upon conviction of RICO offenses totaled some $30-$80 million. By entering into the forfeiture agreement, however, they limited their risk of financial penalties to $22 million. 149 Defendants have retained this bargained-for limitation despite their defaults. The district court found itself barred from imposing fines on them or ordering restitution. By the time defendants defaulted, forfeiture questions could no longer be submitted to the jury. And defendants' assets worth upwards of $53 million, though subject to a sheriff's auction to permit collection of the $22 million, are not themselves forfeited by reason of the defaults. See United States v. Paccione, 948 F.2d 851 (2d Cir.1991). 150 The government, on the other hand, though it has the right to enforce default judgments against Paccione and Vulpis, has hardly received the principal benefit of its bargain. It was to receive $22 million in cash within 90 days, thereby receiving the monetary penalties for the RICO convictions without further effort on its part. Instead the government received nothing and is required to engage in perhaps protracted court proceedings, pursue defendants' assets, and attempt to sell those assets in order to collect its judgments. See United States v. Paccione, 948 F.2d 851 (2d Cir.1991) (government required to follow state creditor procedures to collect its $22 million). 151 Given the district court's adequately supported finding that defendants had entered into the forfeiture agreement without intending to perform it, we see nothing in the Guidelines or in logic to suggest that the conduct of Paccione and Vulpis should not have been considered attempts to impede[ ] the administration of justice during the ... sentencing of the instant offense within the meaning of Guidelines § 3C1.1, warranting a two-level upward adjustment in offense level. If the present type of fraud was not envisioned by that section, an upward departure under § 5K2.0 was hardly an abuse of discretion.