The Honduran supreme court has ruled that privately run cities in the Central American country would be unconstitutional, threatening a project to build "model cities" with their own police, laws, government and tax systems.
The five-judge panel voted 4 to 1 to reject the proposals, in a ruling that goes against the Honduran government and the country's elite.
Because the decision was not unanimous, the case now goes to the full 15-member supreme court, which is expected to take up the issue within the next 10 days.
The judges argued that "the foreign investment expected to be received by the state of Honduras implies transferring national territory, which is expressly prohibited in the constitution," according to a copy of the ruling obtained by the Associated Press.
The Honduran government last month signed a memorandum of understanding with investors on the construction of three "private" cities that supporters of the project say would bring badly needed economic growth to the country.
The investment group MGK was expected to invest $15m (£9.3m) to begin building basic infrastructure for the first model city near Puerto Castilla on the Caribbean coast. That first city would create 5,000 jobs over the next six months and up to 200,000 jobs in the future, authorities said. South Korea has given Honduras $4m to conduct a feasibility study.
Another city was planned for the Sula valley in northern Honduras and a third in southern Honduras.
The project is opposed by civic groups as well as the indigenous Garifuna people, who say they don't want their land near Puerto Castilla to be used for the project. Living along Central America's Caribbean coast, the Garifuna are descendants of the Amazon's Arawak Indians, the Caribbean's Caribes and escaped West African slaves.
Authorisation for the creation of private cities was passed by the Honduran Congress in January 2011 amid much controversy. Last November, the supreme court received a complaint against the proposed cities filed by Oscar Cruz, a former constitutional prosecutor, who calls the project "a catastrophe for Honduras."