Boise County failed to prove it is insolvent and should be protected from a $4 million judgment, said Chief Judge Terry L. Myers of the U.S. Bankruptcy Court, District of Idaho.
After a jury last year found that the county violated the federal Fair Housing Act in trying to limit development firm Oaas Laney's proposal to build a teen treatment center called Alamar Ranch, the developer was awarded damages against the county, which says it also owes attorney fees of about $1.4 million.
Boise County has an operating budget of about $9.4 million.
In March, the county board of commissioners announced that it had filed for Chapter 9.
Now, a 43-page decision says the county is ineligible to be a debtor under Chapter 9.
"We do not know the effect of this yet in our ultimate planning and will not comment," Boise County Commission Chairwoman Jamie Anderson said via email Friday.
D. Blair Clark, the attorney representing the county in its bankruptcy filing, said he had not yet had a chance to read the decision and declined to comment without consulting with his client.
But Tom Banducci, an attorney with the firm that is representing Oaas Laney said: "We are pleased with the court's decision, and we are looking forward to seeing if we can't work this out with Boise County. We hope to get the legal wrangling behind us and get the judgment paid and move forward."
There have been just 625 filings since the Chapter 9 option became available to municipalities in 1937, according to James Spiotto, a Chicago attorney who has written numerous books on the topic.
Most local governments that filed for bankruptcy have done so because of massive bond debt.
Spiotto said Friday that about one-third of all cases are dismissed for failure to meet requirements of code or are voluntarily withdrawn.
After the jury awarded Oaas Laney millions last year, several settlement attempts were made between late January and March, and Myers' decision contains some details.
On Feb. 22, the county offered to pay $3.2 million, including $1.9 million in cash immediately, with the rest raised from a 3 percent increase in property tax levy for a 10-year period and any proceeds from a lawsuit against the county's insurer. The county also offered Alamar Ranch principals forgiveness on $164,000 in past due taxes on its properties.
There was a caveat, however, that if none of these methods generated sufficient funds to satisfy the $3.2 million offer in 10 years, the remaining balance would be forgiven.
Alamar rejected the offer.
In its bankruptcy filing, the county listed assets of $27.7 million and liabilities of $7.3 million, including the $4 million judgment and $1.5 million in plaintiffs' attorneys fees, according to Myers' decision.
The county's 2011 budget anticipates expenditures of $9.3 million.
Myers determined that Boise County was ineligible for Chapter 9 because it did not prove that it was insolvent at the time of filing.
To meet that burden, according to federal law, would mean "generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute, or unable to pay its debts as they become due."
The county pointed to $550,000 in medical indigency claims that had not paid as debt not paid when due, but Myers said that doesn't represent "general non-payment of debts" but rather failure to pay a single category of claims.
Furthermore, he said, the County Indigent Fund contained more than enough money to cover those costs and projected claims for the rest of the year.
Myers also rejected the county's claim that it could not both pay the Alamar judgment and continue to cover the cost of daily county operations.