Diablo Grande CFD: California's Failed Mega-Development Files Chapter 9
Diablo Grande CFD filed chapter 9 with 74.6% tax delinquency and $3.87M bond defaults.
In California's Central Valley, roughly nine miles southwest of Patterson, a gated community faces a municipal bankruptcy filing tied to Mello-Roos bond delinquencies. The Diablo Grande Community Facilities District No. 1 filed for Chapter 9 municipal bankruptcy on November 25, 2025. With a 74.6% special tax delinquency rate—the highest among California Mello-Roos districts—and nearly $4 million in accumulated bond defaults, the case follows decades of limited development, developer bankruptcies, and a water supply dispute that has left roughly 600 households paying $568 per month for water service.
The Diablo Grande history traces back to the early 1990s, when pharmaceutical entrepreneur Donald Panoz envisioned transforming 28,500 acres of ranchland into a master-planned community with resort and golf amenities. Subsequent development did not meet those plans and produced repeated financing problems, developer bankruptcies, and a water supply dispute tied to the district's tax base. The CFD bankruptcy now places the district's debt adjustment and resident costs in the chapter 9 process.
| Debtor(s) | Diablo Grande Community Facilities District No. 1 |
| Case Number | 25-26635 |
| Court | U.S. Bankruptcy Court, Eastern District of California |
| Judge | Hon. Jennifer E. Niemann |
| Petition Date | November 25, 2025 |
| Debtor Type | Community Facilities District (Mello-Roos) |
| Governing Authority | Western Hills Water District Board of Directors |
| Location | Patterson, Stanislaus County, California |
| Debtor's Counsel | Burke, Williams & Sorensen, LLP |
| Estimated Creditors | 1-49 |
| Bond Default Amount | $3,867,139 (as of September 1, 2024) |
| Special Tax Delinquency | 74.6% (~$3.6 million) |
| Status Conference | January 7, 2026 (9:30 AM) |
| Table: Case Snapshot |
Chapter 9 Municipal Bankruptcy
Unlike typical corporate reorganizations under Chapter 11, the Diablo Grande CFD proceeding falls under Chapter 9 of the Bankruptcy Code—the provision reserved exclusively for municipalities and special districts. This distinction shapes how the case will proceed and what remedies remain available to creditors.
Why Chapter 9 applies. Community Facilities Districts established under California's Mello-Roos Act qualify as municipalities under Bankruptcy Code Section 101(40), which defines "municipality" to include any "political subdivision or public agency or instrumentality of a State." As a CFD formed by the Western Hills Water District pursuant to the Mello-Roos Community Facilities Act of 1982 (California Government Code Sections 53311-53368.3), the Diablo Grande district meets this definition. Chapter 9 provides a framework for municipal debtors to adjust their debts while respecting the constitutional limits on federal court interference with state sovereignty over local government operations.
Section 109(c) eligibility requirements. To qualify for Chapter 9 relief, a municipal debtor must satisfy five statutory prerequisites. Court filings in the Diablo Grande case establish how the CFD meets each requirement:
First, the debtor must be a municipality. The CFD was established by formal resolution of the Western Hills Water District Board of Directors on September 24, 2000, making it a lawfully constituted governmental entity under California law. Second, the debtor must be specifically authorized by state law to file for Chapter 9. California Government Code Section 53760(b) explicitly authorizes community facilities districts to seek bankruptcy protection, provided the governing body adopts a resolution finding that the district's financial condition jeopardizes residents' health, safety, or well-being. The Western Hills board adopted such a resolution as part of the filing.
Third, the debtor must be insolvent—meaning unable to pay debts as they become due. The CFD's pattern of bond defaults since March 2021 and the 74.6% special tax delinquency rate establish this condition. Fourth, the debtor must desire to effect a plan to adjust its debts, which the petition expressly states. Fifth, the debtor must have attempted good-faith negotiations with creditors or show that such negotiations were impracticable. The CFD's filing asserts that negotiations were impracticable, satisfying this alternative requirement under Section 109(c)(5)(B).
Health and safety finding. The resolution authorizing the Chapter 9 filing specifically found that the CFD's financial distress jeopardized the health, safety, and well-being of residents within the district's boundaries. Residents now pay $568 per month for water service after approving a 300% rate increase in June 2025 to avoid service termination.
Case timeline and upcoming proceedings. The bankruptcy remains in its earliest stages. Following the November 25 petition, Judge Jennifer E. Niemann was assigned to the case on November 26, and an order setting the initial status conference was entered on December 4. The court has directed the debtor to file a status conference statement by December 31, 2025, with the status conference itself scheduled for January 7, 2026, at 9:30 AM in Fresno. At that hearing, the court will address case administration matters including deadlines for notice, objections to the petition, and creditor list filings. With only eight docket entries as of late December, substantive proceedings have yet to begin.
Diablo Grande Development History
The origins of Diablo Grande trace to Donald Panoz, an American entrepreneur whose pharmaceutical career generated the resources to pursue his real estate ambitions. In 1961, Panoz and Milan Puskar founded Milan Pharmaceuticals, which later became Mylan, one of the nation's largest generic drug manufacturers. He led the research group that invented the transdermal patch, a time-release medication delivery system used in nicotine patches, pain management, and hormone therapy. When Mylan declined to develop the technology, Panoz departed in 1969, relocated to Ireland, and founded Elan Corporation, which became the first Irish company publicly listed on a U.S. stock exchange.
By the early 1990s, Panoz was pursuing diverse ventures including the Chateau Elan Winery & Resort in Georgia and, later, the American Le Mans racing series. His California venture planned a large-scale project: preliminary plans distributed in May 1990 envisioned transforming 28,500 acres of foothill terrain—roughly twice the size of Manhattan—into a self-contained master-planned community. The development program included:
- 5,000 to 10,000 residential homes
- Six championship golf courses
- A resort hotel and spa
- An equestrian center
- Vineyards and a winery
- Commercial properties including a high-tech research park
The Stanislaus County Board of Supervisors approved the project in fall 1993, and investors poured approximately $120 million into development before the 2008 financial crisis changed their plans.
Water supply constraints. From the outset, water supply presented a central challenge. Diablo Grande has no access to groundwater—the development sits atop geology that precludes well drilling. Developers addressed this limitation through an exchange arrangement. In 1998, Berrenda Mesa Water District sold Western Hills an 8,000 acre-feet-per-year contract for State Water Project supplies, paying $8 million for the entitlement. Because State Water Project contracts carry place-of-use restrictions that would normally prevent water delivery 200 miles from the Kern County source, the parties structured an exchange: Kern County Water Agency would deliver Kern River water to Western Hills while receiving the SWP water for distribution to its member agricultural districts.
This arrangement—a water district serving homes 200 miles from its water source through an exchange—functioned as long as payments continued. Developers stopped paying in 2019, and the agreement later became the subject of termination notices and disputes.
Developer transitions and defaults. The original developers filed for Chapter 11 bankruptcy on March 10, 2008, citing $54 million in unpaid debts. At that point, 350 homes had been built, and 70 faced foreclosure. The California Department of Health suspended building permits in January 2009 due to water quality concerns. By October 2008, World International LLC purchased the project for $20 million, compared with approximately $120 million invested earlier.
World International pursued a revised plan, and a 2017 master plan set projected housing units at 2,354, down from Panoz's original 5,000-10,000. The revised plan never materialized. Special taxes assessed against developer-owned parcels went unpaid starting in 2017. The last payment to Kern County Water Agency for water delivery costs was made in 2019. In May 2020, World International sold the project to Angels Crossing LLC, which inherited the unpaid obligations. Residents assumed management of the Western Hills Water District in 2020, inheriting substantial developer-era debt.
What was actually built. The project produced approximately 600 homes—roughly 10% of the minimum projection. The 2020 census recorded a population of 1,669, a fraction of the tens of thousands Panoz had envisioned. No resort hotel or high-tech research park was built, and the vineyards and winery were not developed. Panoz himself acknowledged Diablo Grande as one of his few business ventures that did not succeed before his death in 2018.
The Water Crisis
The debt to Kern County Water Agency is central to the current water-supply dispute. Western Hills Water District owes approximately $13.5 million for years of unpaid transportation and operations-and-maintenance costs associated with the water exchange arrangement. When residents assumed control of the water district in 2020, they inherited this liability.
The water exchange structure. The development cannot access local groundwater, making the Kern County arrangement essential. From 2001 through 2025, Western Hills' entitlement under the exchange yielded 105,520 acre-feet of water. But the community used only 19,498 acre-feet—a fraction of the available supply. KCWA sold approximately 61,723 acre-feet of the excess water to its member agricultural units, generating revenue that offset but did not eliminate the debt as developers stopped paying their share of costs.
Termination threat and legal dispute. In mid-2025, Kern County Water Agency moved to terminate the water exchange agreement, threatening to cut off the community's only water supply. Western Hills' attorney, Colin Pearce, contested the termination in a July 14 letter, arguing that the agreement authorizes suspension of deliveries for non-payment but does not permit outright termination. The letter also indicated Western Hills' intention to sell all or part of its 8,000 acre-foot water entitlement to repay the KCWA debt—the water rights having market value in California's water market.
KCWA's July 29 response did not fully close the door on a negotiated resolution but rejected many of Pearce's legal assertions. The agency granted a conditional extension through December 31, 2025, allowing time for the Proposition 218 rate process to conclude.
The 300% rate increase. Facing potential water shutoff, residents voted in a June 2025 Proposition 218 proceeding to raise their monthly base water rate from $145 to $568—an increase of nearly 300%. Under California's Proposition 218, such rate increases require property owner approval; the district received only 14 protests (plus two invalidated protests), well below the majority needed to block the measure. Board members stated the rate would be adjusted downward once the crisis passed, but acknowledged that some residents—particularly those on fixed incomes—may be unable or unwilling to sustain payments at this level.
The rate increase took effect July 1, 2025, setting the base monthly rate at $568. For a community of roughly 600 homes, this represents collective annual water costs exceeding $4 million for basic service.
Developer Failures and Tax Delinquency
The CFD's financial condition is tied to the failure of successive developers to pay the special taxes that secure Mello-Roos bonds. When developers control significant acreage within a CFD and stop paying, the district cannot generate sufficient revenue to meet bond obligations.
The tax delinquency record. According to California State Treasurer data, Western Hills Water District Diablo Grande CFD No. 1 holds the highest special tax delinquency rate among all Mello-Roos districts in California at 74.6%, representing approximately $3.6 million in unpaid special taxes. This rate reflects the concentration of taxable parcels in developer hands and those developers' nonpayment.
The delinquency is concentrated among two entities:
| Developer | Delinquent Amount | Parcels Affected |
|---|---|---|
| Angels Crossing LLC | $12.6 million | 13 major parcels |
| Angels Crossing LLC | $668,910 | 63 additional properties |
| World International LLC | $219,200 | 1 parcel |
| Total | ~$13.7 million | 77+ parcels |
These developers have not paid special taxes since the end of 2017, leaving the CFD without the revenue stream pledged to bondholders.
Foreclosure proceedings. Western Hills Water District filed foreclosure suit in June 2021 to recover the delinquent taxes through forced sale of the underlying properties. In January 2025, the Superior Court ruled in favor of the district, and the water district subsequently took possession of the tax-delinquent parcels. The Stanislaus County Sheriff's Office prepared for a foreclosure auction, with properties including undeveloped land, portions of the closed golf courses, a clubhouse, and bare residential lots.
Community leaders have expressed hope that foreclosure sales might attract a developer to complete the project.
Bond Defaults
The CFD's bond defaults followed the special tax delinquency. With 74.6% of taxes unpaid, the district lacked funds to meet its obligations to bondholders.
Bond issuances. The CFD issued Mello-Roos bonds in two tranches:
| CDIAC Number | Issue Date | Bond Type |
|---|---|---|
| 2014-0945 | July 25, 2014 | Special tax bonds |
| 2015-1143 | June 16, 2015 | Special tax bonds |
These bonds were secured by the special taxes assessed against properties within the CFD. The bond proceeds funded infrastructure improvements necessary for development—water, sewer, roads, and related facilities.
Pattern of defaults. California State Treasurer Default and Draw on Reserve Reports document the CFD's failure to meet its obligations:
| Default Date | Amount Due | Type |
|---|---|---|
| March 1, 2021 | $948,110 | Interest |
| March 1, 2023 | $948,110 | Interest |
| September 1, 2024 | $948,110 + principal | Interest and principal |
| Total Default | $3,867,139 | Outstanding |
The pattern shows biannual interest payments going unmade over multiple years, with the most recent default also including principal due. Bondholders have received no payments since early 2021.
Mello-Roos bond mechanics. Under California's Mello-Roos financing framework, special taxes constitute liens on the properties within the district. When property owners fail to pay, the governmental entity may foreclose to recover the tax revenue. Foreclosure can be a lengthy process, and recoveries depend on sale prices for the underlying parcels.
Golf Course Closures
The closure of Diablo Grande's golf courses reduced amenities central to the development's positioning. The courses were central to the community's identity and marketing.
The Legends Course. Designed by Jack Nicklaus and Gene Sarazen, the Legends Course opened in 1998 as a primary attraction. The course closed in March 2014 after California's severe drought made irrigation impossible. Because Diablo Grande has no groundwater access, the course depended entirely on delivered water, which became scarce and expensive as drought conditions persisted. Thousands of farmers south of the Sacramento-San Joaquin Delta received zero irrigation allocations that year, and irrigation deliveries were limited.
The Ranch Course. The Ranch Course continued operating after the Legends closure, serving as the community's sole remaining golf amenity. World International announced the Ranch Course's closure in October 2019, citing financial reasons. The developer characterized the closure as temporary, but both courses remain shuttered as of 2025. The clubhouse and course facilities are now among the properties subject to foreclosure proceedings.
The course closures removed amenities that were part of the development's golf offerings. Residents now live in a community without operating courses while paying the $568 monthly water rate.
CFD Financing Dynamics
The Diablo Grande bankruptcy highlights issues for municipal bond investors, developers considering Mello-Roos financing, and policymakers focused on California's development finance structure.
Concentration risk in developer-led CFDs. Diablo Grande shows concentration risk when a developer controls the majority of taxable parcels within a CFD and stops paying. The 74.6% delinquency rate reflects this dynamic: most of the CFD's tax base sat in developer-controlled parcels, and when developers defaulted, bondholders primarily faced foreclosure proceedings.
This risk is inherent in development-stage Mello-Roos bonds, where bond proceeds fund infrastructure before homes are built and sold. Investors in such bonds are underwriting development risk—the risk that the developer will fail before transferring taxable parcels to individual homeowners. Diablo Grande reflects a case where development largely stalled, leaving developers holding parcels they did not pay taxes on.
Chapter 9 limitations. Chapter 9 bankruptcy provides less creditor leverage than Chapter 11. Federal courts cannot mandate specific terms in a municipal debt adjustment plan, respecting state sovereignty over local government operations. The bankruptcy judge cannot force the CFD to raise taxes, sell assets, or take other actions against the wishes of the governing authority. This limits creditor leverage in the bankruptcy process.
Additionally, Chapter 9 cases are rare—only about 600 have been filed nationwide since the chapter was established—providing limited precedent for how CFD bankruptcies resolve. Most Chapter 9 cases involve cities or counties; single-purpose districts like water districts or CFDs constitute a smaller subset.
Water as collateral value. Western Hills' 8,000 acre-feet water entitlement is a possible asset in the case. California's water market assigns value to such entitlements, and the district has indicated it may sell all or part of this asset to satisfy the KCWA debt. Any sale would need to address continued water service for residents, which adds complexity.
What's Next for Diablo Grande
The bankruptcy case remains in its preliminary stages, with key proceedings scheduled for early 2026.
Upcoming deadlines. The debtor must file a status conference statement by December 31, 2025, outlining the case posture and anticipated proceedings. The initial status conference on January 7, 2026, will address administrative matters including deadlines for notice to creditors, objections to the petition, and filing of the complete creditor list. These early proceedings will address case administration and scheduling.
Open issues. No debt adjustment plan has been proposed. Open issues include the treatment of bond obligations, the foreclosure proceedings on developer parcels, the $13.5 million KCWA debt, and the potential sale of the 8,000 acre-foot water entitlement referenced in correspondence.
Resident impact. Residents have already absorbed a 300% water rate increase to avoid shutoff. The golf courses remain closed, and the $568 monthly water rate is now in effect.
Frequently Asked Questions
What is a Community Facilities District (CFD)?
A Community Facilities District is a financing mechanism under California's Mello-Roos Community Facilities Act of 1982 that allows local governments to issue bonds repaid through special taxes assessed on property owners within the district. CFDs typically fund infrastructure—water systems, roads, schools, and related facilities—for new developments. The special taxes are liens on the underlying properties, giving bondholders security in the real estate.
Why did Diablo Grande CFD file Chapter 9 instead of Chapter 11?
Chapter 9 is the Bankruptcy Code chapter specifically designed for municipalities and special districts, while Chapter 11 applies to private businesses. As a Community Facilities District established under California's Mello-Roos Act, Diablo Grande CFD qualifies as a municipality under federal bankruptcy law and must use Chapter 9 rather than Chapter 11. This chapter provides special protections for municipal autonomy, limiting the federal court's ability to mandate specific actions by the debtor.
How much does Diablo Grande CFD owe?
The CFD has approximately $3.87 million in accumulated bond defaults as of September 2024, including missed interest payments since March 2021 and principal due in September 2024. The broader crisis involves $13.5 million owed by Western Hills Water District to Kern County Water Agency for water supply costs, plus approximately $13.7 million in delinquent special taxes owed by developers Angels Crossing LLC and World International LLC.
Why are water rates so high at Diablo Grande?
Residents approved a nearly 300% rate increase in June 2025, raising monthly base rates from $145 to $568, to prevent Kern County Water Agency from terminating the community's water supply. The rate increase was necessary because developers stopped paying their share of water costs in 2019, leaving residents to shoulder the accumulated $13.5 million debt to KCWA. Diablo Grande has no groundwater access and depends entirely on water delivered from Kern County, 200 miles away.
What happened to the Diablo Grande golf courses?
The Legends Course, designed by Jack Nicklaus and Gene Sarazen, closed in March 2014 due to California's severe drought. The Ranch Course closed in October 2019 for financial reasons. Both courses remain closed as of 2025, and the course facilities are among properties subject to foreclosure for unpaid special taxes. The closures removed amenities that were part of the development's golf offerings.
Who originally developed Diablo Grande?
Donald Panoz, the pharmaceutical entrepreneur who co-founded Mylan and invented the transdermal medication patch, envisioned the 28,500-acre development in the early 1990s. Original investors filed Chapter 11 bankruptcy in March 2008 with $54 million in debts. World International LLC purchased the project in October 2008 for $20 million, then sold to Angels Crossing LLC in May 2020. Neither successor developer completed the project or maintained payment of special taxes.
What is the current status of the bankruptcy case?
The case remains in early stages with only eight docket entries as of late December 2025. A status conference is scheduled for January 7, 2026, at 9:30 AM in Fresno, where the court will address case administration and establish deadlines for notice, objections, and creditor list filings. No debt adjustment plan has been proposed, and substantive proceedings have not yet begun.
Can the CFD's water rights be sold to pay debts?
Western Hills Water District has indicated it may sell all or part of its 8,000 acre-foot-per-year water entitlement to repay the $13.5 million debt to Kern County Water Agency. California's water market assigns value to such entitlements. However, any sale would need to ensure continued water service to residents, adding complexity to negotiations. The district has also discussed potential alternative water purchases from Patterson Irrigation District.
Who is the claims agent for Diablo Grande CFD?
Verita Global (Kurtzman Carson Consultants) serves as the claims and noticing agent. The firm maintains the official claims register and distributes case notifications to creditors and parties in interest.
For more coverage of municipal restructurings and distressed real estate developments, visit the ElevenFlo bankruptcy blog.
