BY CAIN BURDEAU

Associated Press

NEW ORLEANS

--A surprise ruling by a federal appeals court that lets the Army Corps of Engineers off the hook for paying compensation for Hurricane Katrina's catastrophic flooding isn't going over well on the streets of New Orleans.

People in southern Louisiana have taken for granted that the flooding in the wake of the 2005 storm was a manmade disaster--one caused by the corps--and they have wanted the agency to pay up for lost homes and property.

But on Monday, a three-judge panel of the 5th Circuit Court of Appeals reversed its earlier opinion and shot down the only argument that had succeeded so far in holding the corps accountable. The ruling also could make it extremely difficult to force the government to pay damages for future mishaps.

In March, the appellate court panel upheld a 2009 ruling by U.S. District Judge Stanwood Duval that had found the corps liable for the flooding of New Orleans' Lower 9th Ward neighborhood and St. Bernard Parish because the agency failed to properly maintain a shipping channel. That channel, dug in the 1960s, funneled Katrina's storm surge into the city. Thousands of homes were destroyed, about 1,400 people died in the flood and much of the city was left under water.

Then on Monday, the same panel did a legal backflip and said its new ruling "completely insulates the government from liability," leaving lawyers and residents baffled.

"There are certain criteria where the federal government can be sued, and I think the levee breaches is a perfect example because the Corps of Engineers is the one that developed the levee system," said Alvin Alexis, 62, who had two female cousins die in the flood.

His home was flooded, and he moved his family across the Mississippi River to an area he considers safer. Because he was a renter, he said he got only $10,000 in federal aid.

In the Lower 9th Ward, one of the areas hit hardest by Katrina, restaurant owner Henry Holmes said he was disappointed. He said he has struggled to keep his restaurant open in an area that is now a mere shell of what it was before the storm.

"I feel like somebody should be held liable," Holmes said.

Neither Holmes nor Alexis were plaintiffs.

Despite the tens of billions of dollars in reconstruction money spent so far in New Orleans, some 500,000 people, businesses and government agencies have sought additional compensation by filing claims against the corps.

But federal laws grant the corps extensive immunity against flood-related lawsuits and give the government lots of leeway in how agencies conduct their business.

The small army of lawyers fighting the corps over Katrina has long lamented how difficult it is to take on the federal government.

"It's a Herculean task," said Pierce O'Donnell, a lead attorney in the case. "The government makes the laws--they created the immunity; it prints the money--they have unlimited funds; and the case is tried in a building called the U.S. courthouse."