In an opinion issued Thursday, justices said a lower court judge erred in dismissing the suit filed by Citizens for Cold Springs and Joan and Raymond Liscom against the city and Lifestyle Homes.
The case was remanded to Washoe District Judge Steven Elliott for further proceedings.
The City Council approved the voluntary annexation sought by Lifestyle Homes and 10 other property owners in 2005. Development plans included more than 5,000 homes and a large business park.
Residents of the rural community north of Reno sued, saying it would adversely effect their way of life.