In re First Alliance Mortgage Co.

The Commonwealth of Massachusetts (the commonwealth) brought a consumer-protection lawsuit against First Alliance Mortgage Company (FAMCO) (debtor) in Massachusetts superior court. The commonwealth asserted claims for injunctive relief, civil penalties, attorney fees, and restitution on behalf of 299 Massachusetts residents who had borrowed money from FAMCO. Roughly 35,000 other borrowers nationwide had potentially similar claims against FAMCO. While the litigation was pending, FAMCO filed for Chapter 11 bankruptcy. The commonwealth asked the bankruptcy court to declare that the Bankruptcy Code’s automatic stay did not apply to the commonwealth’s superior-court action. The commonwealth asserted that it had commenced the action against FAMCO to address deceptive sales and training practices and FAMCO’s charging of excessive points for mortgage loans; the commonwealth thus argued that its action fell under 11 U.S.C. § 362(b)(4)’s exception to the automatic stay for a governmental unit’s action or proceeding to enforce the governmental unit’s police and regulatory power. The bankruptcy court found that the 35,000 similar claims against FAMCO should be adjudicated in the bankruptcy case to ensure that similarly situated creditors were treated equally and that FAMCO’s bankruptcy estate would not be depleted. The bankruptcy court then ruled that only the injunctive relief sought by the commonwealth was exempt from the automatic stay but that the commonwealth could not proceed with respect to determining any restitution, penalties, or other awards in the superior-court action. The commonwealth appealed.