City of Cle Elum, WA files for bankruptcy over housing dispute
Cle Elum, WA, files for Chapter 9 bankruptcy
Multi-million dollar debt from an intense legal dispute has forced the city of Cle Elum into chapter 9 bankruptcy.
CLE ELUM, Wash. - A nearly $26 million debt from an intense legal dispute over a delayed housing project has forced the City of Cle Elum into bankruptcy. Mayor Matthew Lundh said the decision was not made lightly when filing for Chapter 9 Bankruptcy on Tuesday.
The Cle Elum City Council voted unanimously on Monday to proceed with the bankruptcy filing.
City of Cle Elum files for bankruptcy: Part 1
The city of Cle Elum has filed for bankruptcy, stemming from a multi-million dollar debt over a delayed housing project.
"For months, we pursued every reasonable avenue to reach a fair and responsible settlement with City Heights. Unfortunately, we were unable to do so. Our priority continues to be protecting Cle Elum’s residents, essential services, and our financial future. Chapter 9 allows us to do just that," said Lundh.
The backstory:
At the center of the legal dispute is a hilly neighborhood just north of downtown Cle Elum. The site is where more than 900 homes were supposed to be built on nearly 360 acres. The plan was initiated in 2011 between the city and housing developer, City Heights Holdings.
Through the years, the housing project was stagnant while disputes over contract terms and permit applications intensified between both parties. In November 2024, a King County judge found the city violated the agreement with developers.
The court ordered Cle Elum to pay more than $22 million in damages, plus 12% interest per year and legal fees, totaling about $26 million. It’s a large debt the small city cannot afford to pay "given that the city’s revenues barely satisfy its regular obligations," a city spokesperson said.
"The bankruptcy thing is a bit worrisome for the residents here, myself included," said Holly Tolen, a Cle Elum resident and small business owner.
"We bought out here with the hopes of this being a good investment space. And, if they’re bankrupt, I don’t know how that’s going to affect our investment and just everything here in general. "I mean, it’s a little scary," said Kyle Green, a Cle Elum resident.
City leaders said its mediation team negotiated "in good faith" and proposed the city’s best offers given its limited resources. Still, a deal could not be reached to pay the debt to City Heights Holdings.
City officials wrote in a statement, "The City made increasingly generous offers during the 3 months’ long mediation process, but the City’s final offer was rejected by City Heights. The City was willing to make significant concessions to avoid a bankruptcy filing, but it could go no further without jeopardizing the ability to pay for necessary city services over the next 20 years. City Heights initiated garnishments to seize the City’s bank accounts prior to the final mediation session, which forced the City to seek Chapter 9 protection when its final offer at the June 16 mediation session was rejected."
The city filed for Chapter 9 Bankruptcy on June 24. Leaders said the filing "allows the city, subject to Bankruptcy Court review and approval, to work toward a more sustainable resolution—likely reducing the city’s total payment obligations to reflect the city’s financial realities."
"Chapter 9 filing is certainly a last resort for a city," said Michael Sweet, chair of financial restructuring and bankruptcy at Fox Rothschild LLP.
Michael Sweet is a bankruptcy expert and attorney who handles these cases nationwide. Though he is not involved in this case, he explained a Chapter 9 bankruptcy filing provides some protection for the city and its services.
"Police or fire will still come when 911 is called. The other essential services for the city are going to continue," said Sweet. "A Chapter 9 filing will allow the city to continue to provide the essential services to the people who live there, people who work there, the people who rely on those services while the city is trying to resolve the financial issues."
What's next:
The financial issue now has Cle Elum considering all options to pay for it. With the city’s budget totaling only a fraction of what it owes to City Heights Holdings, it raises questions about how the debt will be paid. The city spokesperson said, "some form of tax increase may be necessary."
"No one wants an increase in taxes, especially when it’s nothing that we had anything to do with," said Green.
Sean Northrop is the founder and CEO of Trailside Group, which operates City Heights Holdings. Northrop said he and his team were "surprised" to hear about the city’s bankruptcy filing. He claimed city officials did not communicate any objections to the last draft of a resolution proposal during a mediation meeting on June 20.
Northrop further wrote in a statement, "Instead, the city abruptly went silent—then filed for bankruptcy. This leaves a critical question unanswered: If the city genuinely intends to continue ‘good faith negotiations,’ why didn’t it respond to the mediator’s draft before initiating a bankruptcy filing? And if it found any part of the agreement unworkable, why not say so?"
The contentious back and forth has been ongoing. Now, both parties said they are seeking closure rather than more conflict. Moving forward to the future is something the people of Cle Elum also want for their community.
"I think embracing change is pretty important," said Tolen. "I hope that it will be behind us soon."
"It’s a busy place. I’m just hoping that we can survive and make the most of it," said Green.
What they're saying:
Northrop’s statement reads in its entirety:
"City Heights Holdings (CHH) was surprised by the City’s decision to file for Chapter 9 bankruptcy—particularly given how close the parties were to finalizing a resolution just days earlier. Contrary to the City’s statement, mediation had not broken down. After a 13-hour session on June 16, involving full participation from the City’s legal, financial, and elected leadership, the mediator circulated a comprehensive draft agreement on June 20—reflecting substantial consensus on nearly all material terms.
"CHH reviewed that draft and agreed with the framework in substance. Only one item remained open—non-monetary in nature—and related to whether the City was willing to fully leverage existing tools and resources available to it. CHH expressed flexibility and was open to reasonable alternatives. That issue was never framed as a condition to agreement, and remains a solvable detail.
"At no time did the City indicate to CHH or the mediator that it was rejecting the June 20 draft, nor did it propose a "final and best offer" or communicate a breakdown. No specific objections were shared. Instead, the City abruptly went silent—then filed for bankruptcy.
"This leaves a critical question unanswered: If the City genuinely intends to continue "good faith negotiations," why didn’t it respond to the mediator’s draft before initiating a bankruptcy filing? And if it found any part of the agreement unworkable, why not say so?
"Equally misleading is the City’s assertion that bankruptcy was required to release garnished funds. By statute, those funds could not be seized before mid-July. Moreover, on May 13, CHH offered in writing to extend the writ deadline in exchange for a nominal payment—an offer the City ignored, despite having multiple weeks to act.
"We continue to believe the mediator’s June 20 draft—developed with thoughtful input from the City’s own team—offers a workable and sustainable resolution. If the City agrees that the framework reflects shared intent, and that only minor clarifications remain, the parties could conclude a deal swiftly and cooperatively.
"CHH greatly appreciates the effort and professionalism of the City’s mediation team: councilmembers brought forward-thinking leadership; the mayor provided vital historical and fiscal knowledge; planning staff offered actionable land use solutions; and legal and financial advisors were constructive and collaborative. The mediator, Al Smith of Perkins Coie, led the process with clarity and fairness.
"Bankruptcy was not inevitable. It still isn’t.
"If the City affirms that the mediator’s draft captured the substance of agreement, and that the remaining issue is simply a matter of implementation or substitution, then the solution is within reach. "That’s right" would be the beginning of resolution—not just for CHH, but for Cle Elum’s residents and future.
"CHH remains prepared to complete the deal in that spirit—or to protect its rights through the court process, if required. But our hope is for closure, not conflict."
In response to Northrop’s statement, the City of Cle Elum wrote:
"The City entered the June 16th mediation with its bank accounts under siege from City Heights. The June 16 mediation session did not end in a settlement. During and after June 16, CHH continued to press for additional consideration that CHH knew was not agreeable to the City. The City communicated a deadline of Noon on June 20 for CHH to accept the City’s most recent proposal without additional consideration. CHH declined, knowing that refusal to cancel the garnishments with the City’s banks and otherwise resolve the matter in full would force the City to file for bankruptcy.
"The mediation process became frustrating for the City. While the City and the officials participating in the mediations have fully respected the confidentiality provisions of the Confidential Mediation, Sean Northrup, is improperly leaking very selective and misleading information that does not tell the full story. If a judge orders that the parties are free to provide all settlement communications from the mediation process, the City will do so, and it will not paint CHH in a favorable light."
The Source: Information in this story came from statements by the City of Cle Elum and Sean Northrop, and original FOX 13 Seattle interviews and reporting.
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