But the court said Friday that the Council on Affordable Housing (COAH) - a body that Gov. Christie is seeking to abolish - must notify towns in writing before the state seeks to take any of the money and must hold a hearing to allow town officials to argue that the funds were already "committed" to a housing project and therefore cannot be taken.
It was a partial victory for the New Jersey State League of Municipalities and the Fair Share Housing Center, which had asked the court for urgent intervention to prevent the state from taking the funds.
Although the court denied their request for an injunction, which would have barred the state from seizing the funds until the court had heard their appeal, it does buy municipalities some time and a say in the matter.
"It affords us and the taxpayers some due process," said William G. Dressel Jr., executive director of the League of Municipalities. "At least the municipalities now are going to have a fair hearing and be able to make their case. . . . If that money had been swept into the state's general fund [Tuesday] it would have been a total loss."
Christie's spokesman, Michael Drewniak, was unfazed by the court's decision.
"Most importantly, the appeals court denied the stay, which should surprise no one since the law was clear from the beginning," Drewniak said.
To make a convincing argument, towns will need to show the housing council that the money is already spoken for by way of "a legally enforceable agreement with a third party, or by such other means that show a firm and binding obligation," Judge Mary Catherine Cuff wrote in the decision issued by the three-judge panel.
Ultimately, COAH will determine the outcome of the hearing, but Dressel said Friday's ruling affords towns a stronger legal argument if they believe the state wrongfully takes some of their housing funds.
Friday's decision dealt only with the request for emergency relief. The appeal will continue, said Adam Gordon, a lawyer representing the Fair Share Housing Center.
Gordon argues that the housing council has not clarified the standard for proving that funds are committed.
At a hearing in Newark on Friday, he said some towns have submitted spending plans that have been approved by the council, but the council won't say whether that meets the commitment requirement.
He said local officials are worried that the state will try to claw back funds they spend or will take money set aside for future projects.
Last year, Christie used his executive power to abolish the independent housing council and fold its functions into the state government, which would give municipalities and the governor more control over affordable-housing decisions.
But an appellate court overturned his order in March, and the state Supreme Court in June declined to reverse that ruling.
Contact Joelle Farrell at 856-779-3237, firstname.lastname@example.org, or @joellefarrell on Twitter.
This article includes information from the Associated Press.