Judge's ruling lets Chapter 9 case in Washington advance

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The bankruptcy case of a small Washington state city can move forward, a U.S. bankruptcy court judge ruled, rejecting a legal challenge by a developer.

Cle Elum, a city of about 2,200 located about 80 miles east of Seattle, moved to restructure its debt last year, saying it could not reach an agreement with the developer over a $26 million court judgment.

With a budget of roughly $23 million, the city argued that it did not have the means to pay the obligation without making drastic cuts to city services or tax increases that would drive residents out. Bankruptcy is necessary to preserve essential services and fairness to all creditors, the city said.

"I think the city has a legitimate need for bankruptcy relief. It has a massive balance sheet problem," Chief Judge Whitman Holt said in a June 22 hearing. "The city devoted substantial resources and time in attempting to negotiate a resolution."

Cle Elum filed for bankruptcy in 2025 after the developer moved to garnish city funds. It was the first local government bankruptcy since Chester, Pennsylvania, in 2022.

The developer, City Heights Holdings, LCC, had argued that officials didn't negotiate a settlement in good faith, thus disqualifying the bankruptcy filing.

Cle Elum Mayor Matthew Lundh said in a statement that Holt overruled those claims.

"In his ruling, Judge Holt found that the City engaged in good-faith negotiations with City Heights before filing for bankruptcy protection and otherwise filed its Chapter 9 petition in good faith," Lundh said. "He further concluded that the City clearly qualifies as a debtor under Chapter 9."

The long-running dispute stems from CHH's accusation that Cle Elum broke an agreement for a planned community of 960 homes. 

Cle Elum now has until July 31 to file a so-called plan of adjustment of debts that will outline how debts, including the CHH judgment, will be resolved. Cle Elum will remain in control of city services during the bankruptcy.