Stationed in Tacoma where he had grown up, another review of Watkins' security clearance led the Army to revoke it, preventing his promotion from staff sergeant to sergeant first class. In February 1981, represented by an ACLU attorney, he appealed the denial of his security clearance. He wrote in his appeal: "I submit that I have been consistently penalized for my honesty. I will always continue to admit my homosexuality in the future. The Army has seen fit, on numerous occasions, to decide that my homosexuality is no obstacle to my military career." When the Army did not acknowledge Watkins' letter of appeal, his attorney filed suit in federal district court in Seattle. The Army responded with discharge proceedings. Under new regulations that deemed admission of homosexuality, even in the absence of any overt acts, sufficient grounds for dismissal, Watkins' letter admitting homosexuality would be used against him. The Army, despite recently losing in court and settling its dispute with another gay servicemember, Leonard Matlovich, expected to win its case against Watkins. The Army cited Watkins' failure to answer questions about his intentions with respect to future homosexual conduct, but in October 1982, District Judge Barbara Rothstein ruled for Watkins, finding that the Army was estopped from using Watkins' statements against him after repeatedly allowing him to serve and granting him security clearances despite knowing he was gay. As the case proceeded, the Army allowed Watkins to reenlist for another 6 years with the understanding that he would be separated from the military if the District Court's decision was not upheld. In 1983, the Army prevented him from dancing in drag at an army recreation center at Fort Lewis, Washington. A three-judge panel of the Ninth Circuit Court of Appeals reversed the District Court's decision in 1983, finding that the lower court could not require Army officials to act in contradiction of Army regulations unless the regulations themselves were ruled invalid.