Development dispute drives Washington city into Chapter 9 bankruptcy

A small city in Washington state filed for Chapter 9 municipal bankruptcy after an adverse ruling from the arbitrator in a development dispute has the city facing insolvency.

Cle Elum, a city of 2,157 roughly 84 miles southeast of Seattle, filed for bankruptcy Tuesday.

City officials said they couldn’t reach an agreement with City Heights Holdings, LLC, over payment of a $25.9 million judgment related to a housing development.

In November, an arbitrator awarded the developer $22.2 million in damages at a 12% interest rate, which has since grown to the current total.

“We did not make this decision lightly,” Mayor Matthew Lundh said in a statement. “For months, we pursued every reasonable avenue to reach a fair and responsible settlement with City Heights.”

Chapter 9 bankruptcies are fairly unusual for cities and counties. The most recent was Chester, Pennsylvania, which filed in 2022, and has yet to exit bankruptcy. Orange County, California, paid off the remaining debt from its 1994 bankruptcy filing in 2017. Other notable bankruptcies included Detroit and three California cities, San Bernardino, Stockton and Vallejo.

City officials made the decision to seek Chapter 9 protection to preserve essential services and ensure the city remains stable while they work toward a fair resolution, according to the statement. The city also claimed in the statement the developer was seeking to garnish the city’s bank accounts to cover the damages award.

The judgment is several times greater than the city’s roughly $5 million general fund budget, according to a November report on the city’s fiscal 2025 budget.

“CHH proved the city persistently breached the development agreement and CHH is damaged by the breach,” retired Judge Paris Kallas, the arbitrator, wrote in her ruling. She found the city’s actions and delays caused the development company a loss of profit.

The dispute involves the 962-unit City Heights housing development, comprising a mix of apartments, townhomes and single-family homes on a 353-acre parcel.

City Heights and Cle Elum entered into a 25-year development agreement in 2011 for the housing project. The first phase of the project is under construction.

Sean Northrup, the developer of City Heights could not be reached for comment. Northrup is the founder and chief executive of Washington-based Trailside Group, a home-building company founded in 1993.