Cle Elum considers bankruptcy amid $22M debt in development dispute

CLE ELUM, Wash. – Declaring bankruptcy is almost unheard of for cities in Washington.

But leaders in Cle Elum are considering the drastic step amid a long-running dispute with a homebuilder that has left the town deep in hock.

In late November, an arbitrator ruled the city owes $22.2 million to City Heights Holdings, for repeatedly violating an agreement with the developer over its plans to build more than 950 homes in the wooded hills north of downtown.

That’s a giant bill for the Cascade Mountains town with a population of 2,300 and a general fund budget for this year of roughly $5 million.

“We have the judgment, but it’s not something we can pay,” Cle Elum Mayor Matthew Lundh said in an interview last week.

At least not in a lump sum. Lundh and other city officials say they view bankruptcy as a possible – though not ideal – option to allow some breathing room and structure a reasonable payment plan.

The scathing decision by the arbitrator, retired Judge Paris Kallas, found the city “breached its duties of good faith and fair dealing” by repeatedly failing to abide by a deal it signed in 2011, pledging expedited permits and other cooperation with the project.

But instead of smoothing the way, Kallas determined city officials slow-walked permits and sought to impose new conditions on a deal they criticized as outdated and overly favorable to the developer. It’s the third time Cle Elum has been found in violation of its agreement.

After a nine-day arbitration hearing, Kallas sided with the developer and imposed the $22.2 million award, an amount she wrote was based on a “conservative” calculation of damages – plus 12% interest per year. The city may also be on the hook to pay the developer’s legal fees of $3.75 million.

Facing that massive debt, the week before Christmas the Cle Elum City Council met to vote on a motion authorizing a bankruptcy filing. After a closed-door session, the seven-member council tabled the motion, indefinitely delaying action.

“Bankruptcies are rare for a very good reason,” said Lundh, who has been mayor for a year. “My hope is that we won’t need to do it for obvious reasons, but it is there to provide us that protection if collection action does take place.”

Sean Northrop, the developer behind the housing project, said he isn’t demanding that Cle Elum fork over the money it owes immediately. He opposes the city declaring bankruptcy, arguing it would be a needless reputational stain.

“Bankruptcy is a failure option. It’s terrible for the city,” said Northrop, president of Trailside Homes. “They should avoid that at all costs.” The Issaquah, Washington-based homebuilding company owns the City Heights development, marketing its delayed 358-acre Cle Elum stretch of homesites as Ederra, the Basque word for “beautiful.”

Still, Northrop said the city needs to get serious about its obligations. He’s been showing up to council meetings and testifying during the public comment period, accusing the council of refusing to negotiate a deal to resolve the debt.

“Honestly, with no disrespect, I am dumbfounded how I can continue to keep coming to these meetings and offer an opportunity to meet, discuss, talk and then the city ignores the issue,” Northrop told the council at its Dec. 19 session.

Lundh disputes Northrop’s characterization, saying the city has been actively in talks with his company.

“People at the podium are free to say whatever they would like to say,” he said.

Unlike a personal bankruptcy, a municipal bankruptcy under Chapter 9 of the U.S. Bankruptcy Code does not allow a city to wipe away debts or require selling off assets to pay creditors. But it could allow a court to extend payment deadlines or even reduce the principal amount or interest owed.

While rare, there have been some notable city bankruptcies, such as the 2013 filing by Detroit, which had accumulated more than $18 billion in debt.

The only municipal bankruptcy in Washington came in 1991, when North Bonneville in Skamania County filed for bankruptcy after owing $365,000 to the federal government in a dispute with the Army Corps of Engineers.

A 2020 Pew Center analysis of municipal bankruptcies warned they are costly and “can cause long-term damage to a locality’s reputation.” Such bankruptcies also “commonly result in increased taxes, higher fees for services, reduced benefits for workers … and elevated future borrowing costs.”

Located about 80 miles east of Seattle on Interstate 90, Cle Elum was long known as a fueling stop for drivers headed across Snoqualmie and Blewett passes. Signs on the town’s main drag used to advertise its “Easy Through Access.”

But in recent years, the city has become a growing, outer-rung bedroom community for the Seattle area. The downtown main street of cafes, antique shops and brew pubs now touts the town motto as “Heart of the Cascades.”

The growth has brought new vitality and tax revenue, but also conflict as big new developments threaten to alter the small-town character.

The Ederra development alone could double Cle Elum’s population once it’s fully built out.

As of last week, the project is still in its early stages, with seven homes finished and three more under construction.

As part of an advertised master plan, City Heights is pledging parks and hiking trails among other public amenities.

It’s not clear how Cle Elum can pay for its newly acquired debt. The city received a $5 million insurance payout related to the dispute, Lundh said, but spent the money fighting the arbitration case, in which the city’s lawyers argued Cle Elum had acted in good faith. He said insurance won’t cover the $22 million judgment.

More than half of Cle Elum’s $5 million general fund budget is dedicated to the police and fire departments. The city has 29 employees.

While Lundh said Cle Elum isn’t trying to block the City Heights development from getting built, city leaders over the years have disparaged the project deal signed in 2011.

In exchange for the development area getting annexed into the city limits and other benefits, Cle Elum agreed at that time to give the developer 25 years to build. Trailside notified the city in 2019 it was ready to proceed, kicking off the latest dispute.

A city planner publicly described the project at one point as a “zombie project” that was “dead and has come back to life to haunt us,” Kallas noted in her arbitration decision, which detailed years of hostility, including efforts by city officials to get state regulators to crack down on City Heights.

Steve Harper, a Cle Elum City Council member who made the motion to delay a bankruptcy filing last month, said, “I don’t think anybody wants bankruptcy as their first option.”

Still, Harper, who runs a local Radio Shack and is a pastor in addition to serving on the City Council, said city leaders have been “blindsided” by the repeated arbitration rulings against it.

He called the 2011 agreement with Northrop “a very sweet deal” for the developer and pointed to looming traffic and other effects of the housing development, which is connected to the city by a narrow residential road.

“The impacts are just crazy and they are not being mitigated,” he said. “I am hoping we get at a table and come up with something that is a win-win for everybody.”