diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/OverloadResolver.java b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/OverloadResolver.java
index 051582e5988..62013b7a696 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/OverloadResolver.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/OverloadResolver.java
@@ -107,7 +107,7 @@ public class OverloadResolver {
                 ClassDescriptor classDescriptor = (ClassDescriptor) containingDeclaration;
                 inClasses.put(classDescriptor, klass.getConstructors());
             }
-            else {
+            else if (!(containingDeclaration instanceof FunctionDescriptor)) {
                 throw new IllegalStateException();
             }
         }
diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TopDownAnalyzer.java b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TopDownAnalyzer.java
index 69ef8569ede..d2be06c6289 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TopDownAnalyzer.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/resolve/TopDownAnalyzer.java
@@ -24,6 +24,7 @@ import org.jetbrains.annotations.NotNull;
 import org.jetbrains.jet.di.InjectorForTopDownAnalyzerBasic;
 import org.jetbrains.jet.lang.ModuleConfiguration;
 import org.jetbrains.jet.lang.descriptors.*;
+import org.jetbrains.jet.lang.psi.JetClassOrObject;
 import org.jetbrains.jet.lang.psi.JetDeclaration;
 import org.jetbrains.jet.lang.psi.JetFile;
 import org.jetbrains.jet.lang.psi.JetObjectDeclaration;
@@ -191,12 +192,12 @@ public class TopDownAnalyzer {
         doProcess(outerScope, standardLibraryNamespace.getBuilder(), toAnalyze);
     }
 
-    public static void processObject(
+    public static void processClassOrObject(
             @NotNull Project project,
             @NotNull final BindingTrace trace,
             @NotNull JetScope outerScope,
             @NotNull final DeclarationDescriptor containingDeclaration,
-            @NotNull JetObjectDeclaration object
+            @NotNull JetClassOrObject object
     ) {
         ModuleDescriptor moduleDescriptor = new ModuleDescriptor(Name.special("<dummy for object>"));
 
diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
index d7d1713d26c..928d5abd6e9 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ClosureExpressionsTypingVisitor.java
@@ -80,7 +80,8 @@ public class ClosureExpressionsTypingVisitor extends ExpressionTypingVisitor {
         };
         ObservableBindingTrace traceAdapter = new ObservableBindingTrace(temporaryTrace);
         traceAdapter.addHandler(CLASS, handler);
-        TopDownAnalyzer.processObject(context.expressionTypingServices.getProject(), traceAdapter, context.scope, context.scope.getContainingDeclaration(), expression.getObjectDeclaration());
+        TopDownAnalyzer.processClassOrObject(context.expressionTypingServices.getProject(), traceAdapter, context.scope,
+                                             context.scope.getContainingDeclaration(), expression.getObjectDeclaration());
 
         DelegatingBindingTrace cloneDelta = new DelegatingBindingTrace(new BindingTraceContext().getBindingContext());
         temporaryTrace.addAllMyDataTo(cloneDelta);
diff --git a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ExpressionTypingVisitorForStatements.java b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ExpressionTypingVisitorForStatements.java
index c09adcc84b4..aabeaf652cd 100644
--- a/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ExpressionTypingVisitorForStatements.java
+++ b/compiler/frontend/src/org/jetbrains/jet/lang/types/expressions/ExpressionTypingVisitorForStatements.java
@@ -79,7 +79,8 @@ public class ExpressionTypingVisitorForStatements extends ExpressionTypingVisito
 
     @Override
     public JetType visitObjectDeclaration(JetObjectDeclaration declaration, ExpressionTypingContext context) {
-        TopDownAnalyzer.processObject(context.expressionTypingServices.getProject(), context.trace, scope, scope.getContainingDeclaration(), declaration);
+        TopDownAnalyzer.processClassOrObject(context.expressionTypingServices.getProject(), context.trace, scope,
+                                             scope.getContainingDeclaration(), declaration);
         ClassDescriptor classDescriptor = context.trace.getBindingContext().get(BindingContext.CLASS, declaration);
         if (classDescriptor != null) {
             VariableDescriptor variableDescriptor = context.expressionTypingServices.getDescriptorResolver()
@@ -136,7 +137,13 @@ public class ExpressionTypingVisitorForStatements extends ExpressionTypingVisito
 
     @Override
     public JetType visitClass(JetClass klass, ExpressionTypingContext context) {
-        return super.visitClass(klass, context); // TODO
+        TopDownAnalyzer.processClassOrObject(context.expressionTypingServices.getProject(), context.trace, scope,
+                                             scope.getContainingDeclaration(), klass);
+        ClassDescriptor classDescriptor = context.trace.getBindingContext().get(BindingContext.CLASS, klass);
+        if (classDescriptor != null) {
+            scope.addClassifierDescriptor(classDescriptor);
+        }
+        return DataFlowUtils.checkStatementType(klass, context);
     }
 
     @Override
diff --git a/compiler/testData/diagnostics/tests/IdeTemplates.jet b/compiler/testData/diagnostics/tests/IdeTemplates.jet
index b6887d409bc..09e92932894 100644
--- a/compiler/testData/diagnostics/tests/IdeTemplates.jet
+++ b/compiler/testData/diagnostics/tests/IdeTemplates.jet
@@ -18,25 +18,24 @@ fun main(args : Array<String>) {
         else -> <!UNRESOLVED_IDE_TEMPLATE!><#<elseValue>#><!>
     }
 
-    var <#<name>#> = <!UNRESOLVED_IDE_TEMPLATE!><#<value>#><!>
+    <!REDECLARATION!>var <#<name>#> = <!UNRESOLVED_IDE_TEMPLATE!><#<value>#><!><!>
 
-    class <#<name>#> {
+    <!REDECLARATION, REDECLARATION!>class <#<name>#> {
         <#<body>#>
-    }
+    }<!>
 
-    class <#<name>#> {
-        var <#<name>#> : <#<varType>#>
-        get() {
-            <#<body>#>
-        }
+    <!REDECLARATION!>class <#<name>#> {
+        <!REDECLARATION!>var <#<name>#> : <#<varType>#>
+        get() <!RETURN_TYPE_MISMATCH!>{
+            <!UNRESOLVED_IDE_TEMPLATE!><#<body>#><!>
+        }<!>
         set(value) {
-            <#<body>#>
-        }
-
-        val <#<name>#> : <#<valType>#>
-        get() {
-            <#<body>#>
-        }
-    }
-}
+            <!UNRESOLVED_IDE_TEMPLATE!><#<body>#><!>
+        }<!>
 
+        <!REDECLARATION!>val <#<name>#> : <#<valType>#>
+        get() <!RETURN_TYPE_MISMATCH!>{
+            <!UNRESOLVED_IDE_TEMPLATE!><#<body>#><!>
+        }<!><!>
+    }<!>
+}
\ No newline at end of file
diff --git a/compiler/testData/diagnostics/tests/declarationChecks/kt2142.jet b/compiler/testData/diagnostics/tests/declarationChecks/kt2142.jet
new file mode 100644
index 00000000000..4410e01c0a1
--- /dev/null
+++ b/compiler/testData/diagnostics/tests/declarationChecks/kt2142.jet
@@ -0,0 +1,8 @@
+//KT-2142 function local classes do not work
+
+package a
+
+fun foo() {
+    class Foo() {}
+    Foo() // Unresolved reference Foo
+}
\ No newline at end of file