## Facts

- The Commonwealth of Massachusetts, through its Attorney General, filed a state consumer-protection enforcement action against First Alliance Mortgage Company (FAMCO) alleging deceptive loan-origination practices and excessive points charged to Massachusetts borrowers.
- The complaint sought injunctive relief, civil penalties, attorneys’ fees, and restitution for 299 identified borrowers.
- Massachusetts obtained a preliminary injunction in state court restricting FAMCO’s loan-origination activities in Massachusetts.
- FAMCO later filed a Chapter 11 bankruptcy petition, triggering the automatic stay under 11 U.S.C. § 362(a).
- Massachusetts asked the bankruptcy court to declare the state action exempt from the automatic stay under the § 362(b)(4) exception for governmental police or regulatory power.
- The bankruptcy court allowed the injunctive component to proceed but stayed state-court litigation of restitution, penalties, and fees, reasoning that monetary matters should be handled in bankruptcy to protect estate assets and creditor equality.
- Massachusetts appealed to the Ninth Circuit Bankruptcy Appellate Panel.

## Issues

1. Whether a state consumer-protection enforcement action seeking civil penalties, attorneys’ fees, and restitution falls within the 11 U.S.C. § 362(b)(4) police or regulatory power exception to the automatic stay.
2. If § 362(b)(4) applies, whether the governmental unit may prosecute those monetary claims to judgment in state court, even though collection would affect the bankruptcy estate.

## Decision

- The Bankruptcy Appellate Panel reversed the bankruptcy court.
- It held that Massachusetts’s entire enforcement action—including claims for civil penalties, attorneys’ fees, and restitution—fell within § 362(b)(4) and could proceed in state court to judgment.
- The Panel limited the exception to liquidation: obtaining and fixing the amount of the claims was permitted, but enforcing or collecting any judgment against the bankruptcy estate remained barred by the automatic stay.
- The matter was remanded for proceedings consistent with this interpretation.

## Legal Principles

- Under 11 U.S.C. § 362(b)(4), the automatic stay does not bar actions by a governmental unit to enforce its police or regulatory power.
- A court assesses whether the governmental proceeding primarily serves public policy objectives (deterrence, punishment, consumer protection) rather than a pecuniary purpose akin to private debt collection.
- The presence of monetary remedies does not remove a public enforcement action from § 362(b)(4) when those remedies function as regulatory tools (e.g., civil penalties and fee-shifting) or as part of a statutory enforcement scheme (e.g., restitution to affected consumers).
- Bankruptcy courts must distinguish between (a) liquidation of claims to judgment, which may proceed under § 362(b)(4), and (b) enforcement of the judgment against estate property, which remains subject to the stay and bankruptcy administration.

## Conclusion

The Panel held that Massachusetts could continue its consumer-protection case against the Chapter 11 debtor in state court to determine liability and the amount of penalties, fees, and restitution, while preserving the bankruptcy court’s control over any collection and distribution from estate assets.


In re First Alliance Mortg. Co., 263 B.R. 99 (B.A.P. 9th Cir. 2001)