U.S. District Court Judge H. Russel Holland issued the ruling this month after hearing arguments on alleged violations of the federal Fair Housing Act.
At issue was exactly when the U.S. Department of Justice learned of an alleged pattern of housing discrimination against former members of the Fundamentalist Church of Jesus Christ of Latter Day Saints.
Attorneys for Colorado City and Hildale, Utah, say claims for monetary damages and civil penalties are barred by statutes of limitation.
But Holland says it's unclear when the Justice Department had reasonable cause to believe the towns had engaged in discrimination.
He says the towns could raise a statute of limitations defense later on.