Resort City Files for Bankruptcy

Desert Hot Springs, part of the cluster of communities that comprise the ritzy, anything-goes oasis of Palm Springs, has filed for bankruptcy protection, crippled by a legal judgment handed down this week, officials said Thursday.

The city filed for protection under Chapter 9 of the federal bankruptcy code, an emergency measure that protects its assets and property and eventually will allow the city to adjust its debt, estimated at $8 million.

“We had to do it . . . to protect the city, to protect the citizens,” Mayor Matt Weyuker said.

A federal judge declined Tuesday to block a development group that has long sought damages from the city for seizing its assets. The city, which could not cover the about $6-million costs of the case, feared that its only other option was to unincorporate and instead filed for bankruptcy Wednesday after an emergency council meeting.

Desert Hot Springs is believed to be the first government in California to file for bankruptcy since Orange County sought protection in 1994, after losing more than $1.5 billion on its investments, said Megan Taylor, director of communications for the League of California Cities in Sacramento.

Tuesday’s ruling was the latest twist in a long-standing dispute over a 1990 City Council decision.

Eleven years ago, the council threw out Silver Sage Partners Ltd.’s plan to build a mobile home park. The company, which could not be reached for comment Thursday, filed a lawsuit claiming that the city had violated the Fair Housing Act by, in effect, discriminating against low-income families.

A jury awarded Silver Sage $3 million. The city fought the judgment, and the case has been lumbering through the court system ever since. At one point a jury reduced the judgment to $1.

But in July, the U.S. 9th Circuit Court of Appeals reinstated the $3-million judgment and added nearly $3 million in interest and legal fees. Tuesday’s ruling allowed Silver Sage to proceed.

“They had no idea this was coming as quickly as it did,” said Gary Sherwin, vice president of market development for the Palm Springs Desert Resorts Convention and Visitors Authority. “The city had no choice but to file [for bankruptcy], given the situation they were in.”

Although residents and business leaders are understandably alarmed, said Sherwin, “the community is going to continue to function. . . .

“City Hall will continue to operate. The police will continue to protect the city,” he said. “Business will go on as usual--except that now there’s this stigma of bankruptcy.”

Desert Hot Springs, with about 17,000 residents, is known for its natural hot mineral water, 41 spas and, on average, 330 days of annual sunshine. But it has been mired in budget deficits for more than five years.

Last summer, facing a deficit of more than $2 million, city officials persuaded voters to stave off bankruptcy by approving two tax measures intended to shore up the city’s finances. That was no small feat, observers said, in a conservative region that has tossed its share of tax-happy politicians out of office.

Weyuker said that other developers have hesitated before coming to Desert Hot Springs because of the legal judgment hanging over the city’s head, and he hopes those days will now end.

“I think what’s going to happen is that 12 months down the road, or whenever the plan is approved by a bankruptcy court, I think ultimately it’s going to be a major step forward for the city,” Weyuker said. “We’ve been living with a shroud of uncertainty.”