The small city of Cle Elum, Washington has filed for Chapter 9 bankruptcy after losing a legal battle with a developer over a delayed housing project—marking just the second municipal bankruptcy in Washington state history.At the heart of the crisis is a $26 million debt owed to City Heights Holdings, LLC, following a development agreement gone sour. The City says changes in leadership and interpretations of the 2011 agreement led to disputes that escalated to arbitration, resulting in a devastating damages award.