In June, the state Supreme Court ruled that the governor did not have the authority to dismantle COAH on his own. But another question remained: Could the state seize the $200 million or so towns had set aside for affordable housing?
Under a 2008 law, the state can use the money if towns had not committed to spending it within four years of collecting it.
Lawyers for the advocacy group Fair Share Housing Center and the New Jersey League of Municipalities - groups usually on the opposite side of cases - teamed up to oppose the state's effort to take the money.
Last month, an appeals panel said the state could collect the money, but only after giving each town the right to object before any funds were transferred.
Tuesday was to be the deadline to hand over the money. But on Friday, Judges Clarkson Fisher and Philip Carchman said the money should not be transferred.
They ordered the state government to reform COAH, saying that the state had not done so after a March ruling. COAH could still decide to take the money.
Judge William Nugent dissented, saying Fair Share had not proved that the state had ignored the earlier ruling.
Christie spokesman Michael Drewniak said the administration was "disappointed with the appellate court's decision" and was considering its options, including a possible appeal.
"However, this decision on process does not disturb the substantive decision made last month by a different panel of the appellate division, which confirmed that municipalities which held onto the money and failed for four years to use it, or commit to use it, will have to return it," Drewniak said.
He added that Democratic legislators had voted in favor of a state budget that included use of the funds, based on a 2008 law that returned the COAH funding to the state in the event municipalities failed to use the money.
Fair Share said it was the right decision.
"The governor is not a king," Fair Share lawyer Kevin Walsh said in a statement. "He has to comply with the laws on the books. We have worked with municipalities and other advocates to push back against the administration's unfair raid on municipal trust funds. The issue will now be decided in public by a vote of the independent board rather than behind closed doors and under the direction of the governor."