Cle Elum Lawsuit: $22M Judgment, Garnishment, and Bankruptcy

The Cle Elum lawsuit is a contract dispute between the small Washington city of Cle Elum and a housing developer, City Heights Holdings LLC, that ended with an arbitrator ordering the city to pay more than $22 million for repeatedly breaching a 2011 development agreement. Unable to cover a judgment several times larger than its annual budget, Cle Elum filed for Chapter 9 municipal bankruptcy in June 2025.¹

The 2011 Agreement at the Heart of the Case

In November 2011, the Cle Elum City Council annexed roughly 330 acres along the ridgeline north of downtown, rezoned the land for mixed-use development, and signed a 25-year development agreement with the entity that later became City Heights Holdings LLC.² The project, branded Ederra, called for up to 962 homes, retail space, trails, and roughly 200 acres of open space.³

The developer committed to roughly $10 million in mitigation payments for public safety, schools, and infrastructure, with about $9,000 per home in mitigation fees. In exchange, the city promised a streamlined permitting process, including a 45-day administrative review for subdivision permits, and agreed to complete environmental review and public hearings upfront so the developer would not face them again at each phase. The contract also required that any disputes go to binding arbitration rather than court.¹

City Heights Holdings was formally organized in 2019, when Issaquah-based builder Sean Northrop acquired the Ederra property and approached the city to start permitting. The project had been dormant for years.⁴

How the Permitting Dispute Started

When Northrop sought subdivision permits in late 2019, city planning officials insisted on a full public hearing and environmental review rather than the streamlined administrative track written into the 2011 contract.¹

The arbitrator later found that the city went further. It imposed a pre-application process and demanded a cost-reimbursement agreement as a condition of reviewing permits. It attempted to use a more burdensome review track than the contract allowed. It layered on new requirements, including traffic studies, a master park plan, and critical-areas reports that were not part of the original deal. The arbitrator also found that the city actively encouraged state and federal agencies to challenge the development agreement.⁵

Northrop has said the delays pushed back the first phase of Ederra by more than two years and the second phase by more than 18 months. Construction on phase one did not begin until 2022.¹³

Three Arbitrations and a $22 Million Award

Because the 2011 agreement required binding arbitration, the case was heard by retired King County Superior Court Judge Paris Kallas. Three arbitrations took place, and Kallas ruled for the developer in each.¹

The first, in November 2020, confirmed that the city had to follow the expedited permitting process. A second ruling in April 2022 again went against the city on process questions. The decisive ruling came in November 2024, when Kallas found that the city had “persistently breached” the agreement and awarded City Heights Holdings $20,340,000 in economic damages plus $1,890,175 in accrued interest, for a total of $22,230,175.⁵

Damages were calculated using a “but for” analysis, comparing the profits the developer would have earned had the city honored the contract with what actually occurred. City Heights argued the delays cost it the chance to sell homes during the pandemic-era housing boom, when regional demand and prices were surging. The arbitrator accepted the figure as proven with “reasonable certainty.”⁵⁶⁷

Why Settlement Talks Collapsed

The months between the award and the bankruptcy filing produced several proposals, none of which closed.

In December 2024, the city offered $4 million: a $250,000 initial payment (with $200,000 of that coming from a utility tax increase), followed by $250,000 annual payments over 15 years. Northrop rejected it as insufficient, noting that the offer left the remaining balance after 15 years unaddressed. According to the developer, the offer arrived as a one-paragraph email from the city’s future bankruptcy attorney, with no funding plan and no commitment to follow the development agreement going forward.⁸

On January 28, 2025, Northrop submitted a counter-proposal just before a council vote: a $287,000 cash payment, a waiver of $400,000 in road improvement costs the development owed, 18 free building permits, a 60-day delay on collections, and final approval of the second-phase subdivision permits by mid-February. The council declined to consider it and voted 5-2 to pursue bankruptcy.¹

A formal mediation began in March 2025, with sessions on March 24, April 17, and June 16 before mediator Al Smith of Perkins Coie.⁹ The two sides tell different stories about what happened next. City Heights says a draft settlement with multimillion-dollar reductions and a decades-long payment plan was circulated on June 20, 2025, and the city went silent and filed for bankruptcy four days later without formally rejecting it.¹⁰ The city says the developer rejected its final offer at the June 16 session and refused to release garnishments on city bank accounts.¹¹

The Garnishment That Triggered the Bankruptcy

The immediate trigger was a seizure of city funds. On May 28, 2025, Copper Leaf, a lender for the Ederra project owned by Pacific Northwest entrepreneur and film producer Rodger May, filed writs of garnishment against three Cle Elum bank accounts, freezing roughly $696,000.¹⁰⁷ City officials warned the seizure threatened payroll for the city’s 29 employees and payments to vendors.¹² City Heights said the collection was being handled by an outside lender and was not directly within the developer’s control.

On June 23, 2025, the city council voted 6-0 to authorize Mayor Matthew Lundh to file for bankruptcy.¹⁰ The petition was filed the next day in the United States Bankruptcy Court for the Eastern District of Washington as Case No. 25-01128 before Judge Whitman L. Holt.¹³

Why $22 Million Is Catastrophic for a Town This Size

Cle Elum has roughly 2,200 residents. Its annual general-fund budget runs between $4.5 million and $5.5 million, and the $26 million obligation is roughly five times that.¹⁴¹⁰ The entire city government employs about 29 people. Mayor Lundh has described the city as “insolvent” in the near term, unable to obtain bonds or loans, and focused on bare essentials: payroll and keeping water and sewer services running. Council member Steve Harper said the city already operates “on a shoestring” with no reserves or discretionary spending to cut.¹²

The Developer’s Challenge to the Bankruptcy

City Heights Holdings has fought the bankruptcy filing itself. In March 2026, the company filed a 22-page objection asking the court to dismiss the case.⁸

Its central argument is that Cle Elum is the “sole author and exclusive cause of its financial difficulties.” Unlike cities that file over pension crises or population decline, the objection says, Cle Elum’s insolvency stems entirely from its own “willful, serial and comprehensive” breach of the development agreement. The filing calls the city’s conduct “defiant and arrogant” and accuses officials of treating the $26 million debt like “Monopoly money.”⁸

Among the pointed allegations: the developer claims the city received $4.3 million from its insurance pool related to the dispute but spent the money on professional fees rather than applying any of it to the judgment. City Heights says it “did not see a penny” of those insurance proceeds.⁸ The objection also faults the city for not reducing its workforce, cutting wages, or eliminating non-essential programs after the award.

In its May 2026 pretrial submission, City Heights refined its legal theory, arguing the Chapter 9 petition was not filed in “good faith” as required by federal bankruptcy law.¹⁵

Where the Case Stands Now

As of mid-2026 the Chapter 9 case is active and unresolved. The bankruptcy court is reviewing City Heights Holdings’ challenge to the city’s eligibility for Chapter 9 protection, a threshold question that could determine whether the case proceeds at all.¹⁶ The city’s deadline to file a plan of adjustment — its proposal for restructuring and paying off the debt — was extended by agreement to May 30, 2026.⁸

Court filings outline a proposed financial strategy to generate more than $68 million through 2039. The plan includes selling surplus city properties, seeking new taxing authority, cutting the budget by 5%, reorganizing the police contract, and pursuing unconventional revenue sources such as naming rights, electronic billboards, and electric vehicle charging stations.¹⁷ The filings also reference the possibility of assigning professional liability claims against consultants involved in the dispute, potentially contributing $5 million toward recovery. A contested hearing on eligibility was scheduled for June 22, 2026.¹⁶

Political Fallout in the Community

The dispute has divided the small town. Mayor Lundh has framed the bankruptcy as a last resort to protect residents and essential services. Council members Ken Ratliff and Steven Cook have publicly accused the developer of being “underfunded and undercapitalized” and attempting to turn Cle Elum into a “company town.” Ratliff invoked the film “It’s a Wonderful Life,” saying he did not want the city to become a “Potterville.”¹

Northrop has called the city’s actions “government overreach” and said he was willing to accept non-cash concessions such as permit waivers and infrastructure cost reductions rather than drive the city insolvent.¹ Residents have launched recall efforts targeting the mayor and certain council members, and a political action committee is organizing to put a ballot measure before voters that would change Cle Elum from a council-mayor system to a council-manager system.¹⁸

1
Cascade PBS. How a $22M Judgment Against Cle Elum Pushed the City to Bankruptcy
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City of Cle Elum. City Heights Background Information
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Daily Record News. City Heights Holdings Files Formal Objection to Cle Elum’s Bankruptcy Case
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KOMO News. City of Cle Elum Lundh Declaration
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Cascade PBS. Cle Elum Files for Bankruptcy to Settle $22 Million Judgment
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Seattle Times. Cle Elum Declares Bankruptcy Over $26M Debt
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