wfn.org | United Methodists' Pacific Homes saga ends on an up note

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Sept. 10, 1999 News media contact: Tim Tanton*(615)742-5470*Nashville, Tenn.
10-21-71BP{454}

NOTE: Headshots are available with this story.

A UMNS News Feature
By Tim Tanton*

Water was gushing into the boat, and the United Methodists were bailing. On
the shore, "60 Minutes" had a camera crew, ready in case an older adult or
two got pushed overboard to save the ship.

The "boat" was saved, but only after a lot of bailing. And none of the
passengers took a dive.

The bailing-out of the Pacific Homes retirement communities in the 1980s
pulled the United Methodist Church together as only an emergency can. When
the church-related retirement homes in California, Arizona and Hawaii began
foundering because of cash-flow problems, the denomination was drawn into a
legal tangle that raised questions about its own liability and whether it
could be sued in court. The Pacific and Southwest Annual (regional)
Conference took on a $21 million financial commitment to save Pacific Homes.
Two general agencies and other annual conferences around the country rallied
around the cause and raised money. 

"A hole in the boat is a hole in the whole boat," Bishop Jack M. Tuell told
church groups and others as he rallied support for the bailout in the early
1980s. Last June, the retired bishop declared to the California-Pacific
Annual Conference session that the boat has been rebuilt. Cal-Pac and the
Desert Southwest Annual Conference were created with the division of the
Pacific and Southwest Conference in 1984. Tuell had led Pacific and
Southwest and later Cal-Pac.

Today, the two conferences and the denomination's General Council on Finance
and Administration (GCFA) are receiving something unexpected: money back for
what they paid into the settlement. It has been a long time coming, and the
two conferences are applying the dollars to areas of ministry that were cut
in the 1980s.

The paybacks bring a positive close to a drawn-out ordeal that began in the
1970s. At the time, the Pacific and Southwest Conference was involved in the
operation of a chain of 14 retirement homes and convalescent hospitals in
California, Arizona and Hawaii. The Pacific Homes communities, which began
with one retirement home in 1912, had made what proved to be a costly
mistake in the course of pricing and offering lifetime contracts to
residents. 

The homes proved to be "exceptionally good at taking care of the residents,"
said Joel Huffman, Desert Southwest treasurer. As a result, the residents
lived longer than expected, based on Pacific Homes' actuarial projections.
Turnover at the retirement communities slowed down. Pacific Homes wasn't
getting enough new residents, and the existing tenants had already paid up
on their "life care" contracts. Cash flow suffered.

The contracts hadn't been priced high enough, and inflation exacerbated the
problem, said Byron Hayes Jr. of North Hollywood, Calif., who was conference
chancellor from 1979 to 1985. Pacific Homes also hadn't kept money in
reserve to protect against such changes.

In the mid-1970s, "the homes were in real trouble," Tuell said. "They were
just caught in a squeeze."

The conference voted to raise $9 million to stabilize the homes, Tuell said.
However, that effort fell through, and then "the fat was really in the
fire," he said. 

The setback triggered a bankruptcy for Pacific Homes -- and lawsuits.
Pacific Homes filed for Chapter XI under the U.S. Bankruptcy Code on Feb.
18, 1977, and the filing was converted to a Chapter X on Nov. 4 that year.
Chapter X provided added protection from secured creditors while it
reorganized.

The lawsuits started when Pacific Homes asked the residents for money beyond
their contractual obligations. Residents filed at least a half-dozen
lawsuits, with the total claims amounting to almost a half-billion dollars
against not only the annual conference, but also the GCFA, the United
Methodist Board of Global Ministries and the entire denomination, Tuell
said. 

"It was a nightmare all the time," recalled Ewing Wayland, top staff
executive of GCFA then.

The lawsuit in which the major action occurred was Barr vs. the United
Methodist Church et al., in which the plaintiffs sought $266 million. Two
additional lawsuits were brought against the church by the trustee for
Pacific Homes, Richard Matthews, who was suing for enough money to make
Pacific Homes viable again and to enable it to care for the residents.
Another lawsuit, Trigg vs. Pacific Methodist Investment Fund, was filed by
angry bondholders.

The Barr case was filed by 150 residents in October 1977. The class-action
lawsuit was on behalf of all the 2,000 or so life-care contract residents of
the Pacific Homes facilities.

In that case, California Superior Court Judge Ross G. Tharp ruled that the
United Methodist Church was a spiritual organization and not an
unincorporated association under California law, so the church itself
couldn't be sued. The church was "no more than a spiritual confederation"
and was not subject to suit, he said in the March 1978 ruling. "A contrary
ruling would effectively destroy Methodism in this country," he said.

However, the California Court of Appeals reversed that ruling on March 8,
1979, saying the United Methodist Church was an unincorporated association
and could be sued. The church appealed to both the state and U.S. supreme
courts, but neither one would hear the case.

The issue of liability had major implications not only for the Pacific Homes
case but also for other situations in which a denomination could be sued for
the actions of an entity that billed itself as church affiliated. The
question never was fully resolved because a settlement was reached.

A second Pacific Homes-related issue also went to the Supreme Court. This
time, attorneys for GCFA wanted the agency dismissed from the Barr
litigation on the premise that the San Diego trial court didn't have
jurisdiction. Tharp had refused to dismiss the agency, holding that GCFA was
doing business in California and was subject to the jurisdiction of the
state's courts. The California Court of Appeals and the state and U.S.
supreme courts wouldn't hear GCFA's motion.

However, Tharp himself was dismissed. A California appeals court
disqualified him after deciding that he had shown bias in handling certain
issues that were pending when he ruled against GCFA. He was replaced by
Judge James L. Focht.

Though the Supreme Court ignored the case, the nation's news media did not.
CBS' "60 Minutes" news show interviewed Bishop Charles F. Golden, who led
the conference then, and fears were stirred up that the denomination might
throw Pacific Homes residents out onto the street if they couldn't pay their
fees. That didn't happen, but the "60 Minutes" segment stuck in the
collective mind of the church as a defining moment of the Pacific Homes
saga.

The jury trial in the Barr case finally got under way on July 15, 1980.
During the proceedings, some in the church sensed that the court was leaning
toward holding the church liable. It became apparent from the lawsuit that
"the annual conference owned (the homes) lock, stock and barrel," said
Huffman, who was a layman and banker before becoming conference treasurer in
1985. The Board of Global Ministries had plaques throughout the homes,
saying the facilities were board-approved, so that agency also became
potentially liable.

Settlement negotiations began as an initiative by Hayes and conference
Treasurer John Kirkman. They talked at first to Golden, and later brought
Wayland into the loop. "We had come to the conclusion that the church was
spending so much money on this and the outcome was so uncertain that there
had to be some initiative to try to resolve it," Hayes said.

On Hayes' advice, Bishop Golden appointed the negotiating team in spring
1980. Golden had wanted to wait until his successor took over, but Hayes
pointed out that it would take time for the new bishop to get his feet on
the ground and it would be good to have a team in place.

The trial in the Barr case was already under way in California Superior
Court in San Diego when Tuell took up duties as conference bishop on Sept.
1, 1980.

"I was told that the attorneys for the plaintiff were saying to our people
that 'the least we could possibly accept is $47 million,' " Tuell said. "Our
people were saying the most we could possibly raise is $10 million."

The new bishop had a legal background, which seemed to help him understand
details of the case quickly during meetings with lawyers, Hayes recalled.
However, he said, Tuell's real impact was through his spiritual leadership.

As negotiations wore on, Tuell decided to meet with Pacific Homes residents.
He had been invited by United Methodists in the homes to meet with the
residents of all the facilities.

"I was told at that time I couldn't do that because I was a defendant in the
suit and they were the plaintiffs, and only the lawyers talked to the
lawyers," Tuell said. "I thought it was ridiculous that a bishop couldn't go
out and make a pastoral call on his people out there. There was even talk of
an injunction against me to do that." He went ahead anyway.

Tuell told the residents that he understood that they'd been hurt and had
been forced to pay money over and above their contractual obligations. He
told them he wanted to bring about a settlement that was fair, equitable,
feasible. "They were very grateful for this meeting," he said. "You could
almost hear a sigh of relief come up."

The negotiations finally led to a resolution. In December 1980, Judge Edward
T. Butler of the California Superior Court announced the $21 million
settlement. The settlement was officially approved by two of the courts the
following spring, and the jury in the Barr case was dismissed March 10,
1981. The deal also had to be approved by the bankruptcy court.

The conference approved the settlement in a special session Feb. 26-27,
1981, and members committed to raising $11 million cash by the year's end.

"About two days before the end of the year, I came home from the office and
told my wife we made it," Tuell said. "I give tremendous credit to the
people of that conference because they just came together and said, 'We're
going to do this,' and they did it. Frankly, it was inspiring."

The bailout was a denomination-wide effort. About $4 million came from the
GCFA, and $3 million came from the Board of Global Ministries. The bishops
were enlisted, and the annual conferences raised about $2 million.

The $21 million was discounted to $19.5 million because the money was raised
so rapidly. The settlement was structured as a loan from the conference to
Pacific Homes, and it was conditioned on the future cash flow of the
retirement communities. If Pacific Homes' cash flow recovered to a certain
point, the money would be repaid to the conference, agencies and others
involved.

The conference set aside a Residents Assistance Fund to help anyone who
might face the prospect of having to move out of one of the homes. The money
grew to $575,000, and was eventually divided between the Cal-Pac and Desert
Southwest conferences, with Cal-Pac receiving a little more than 77 percent.

No one, not even GCFA, is sure how much the case cost the denomination as a
whole. The church itself, the Board of Global Ministries, GCFA and the
annual conference each had its own lawyers. And, Hayes said, the intangible
costs were incalculable in terms of the programs that couldn't be pursued
and the loss of members and potential members turned off by the situation.

"The lawyers' fees, trustees and bankruptcy fees siphoned off millions,"
Tuell said.

As part of its effort to raise money, the Cal-Pac conference cut its own
budget, temporarily eliminated a district and moved its headquarters into
free space offered by Pasadena First United Methodist Church. "We did a
whole raft of things that succeeded in cutting $1 million out of that year's
budget," Tuell said. The conference also had a campaign at every member
church.

"There's no question but that a number of ministries of the church got
shortchanged, not only in  1981 but ... for several years in the area of
campus ministries, education, a variety of church extensions," Tuell said.
"A number of things got cut back. There's a sense in which now they have
some opportunity to maybe redeem some of that."

"We were talking about selling camps," Huffman recalled. "We were desperate.
It's interesting now the camps will benefit from the return of this."

Tuell led the church through negotiations in 1991 for a restructured
settlement. It was formally approved at the 1992 sessions of both the
Cal-Pac and Desert Southwest conferences, and consummated the next year,
Hayes said. Both conferences, as the successors to the Pacific and Southwest
Conference, had to act in unison. The reworked settlement gave the church a
clearly defined payback schedule for the loan that it had made, and it gave
the borrowers a lower interest rate than the original 12 percent.

In the restructuring, $7.5 million was repaid. The money went to the Board
of Global Ministries and to annual conferences that had made loans or
donations to help fund the original settlement.

Finally, this year, Pacific Homes was able to pay the remaining balance of
the loan. A wire transfer of $16.4 million on March 18 retired the full loan
amount. Cal-Pac received nearly $9.1 million, and Desert Southwest received
$2.6 million. GCFA was paid $4.7 million, some of which was used to create a
mediation and restorative justice center. Nearly $2.7 million was returned
to GCFA's General Administration Reserve and the World Service Contingency
Fund.

Ultimately, all the conferences and agencies that helped were repaid. The
eliminated Cal-Pac district was restored in 1984.

Some Cal-Pac members wanted to return the conference's money to the
churches. Playing off of Tuell's "rebuilt boat" analogy, Bishop Roy I. Sano
of Los Angeles asked the members during their annual conference session
whether they wanted to dismantle the ship or move into the future with the
boat they had rebuilt. The conference decided to focus on evangelization and
winning people for Christ, Sano said.

A conference committee will recommend how best to return the amount that the
churches gave and how to use the money for evangelization, Sano said. The
funds will be invested and the earnings used primarily as loans or grants to
help start ministries and congregations. "We just break the backs of
congregations if they have to do it all by themselves," Sano said, citing
high land and building costs.

The Desert Southwest's money was deposited with the conference foundation
and will fund a strategic plan adopted in 1998, Huffman said. The plan
emphasizes congregational development in the form of church starts and
revitalization, and camping, outdoor and retreat ministries.

"This settlement came at a very timely moment in our conference's life
because we're looking at going into a $10-to-12 million campaign," Huffman
said. The conference has the two fastest-growing counties in the country,
Clark (Las Vegas) in Nevada and Maricopa (Phoenix) in Arizona, he said.
"We're in a growth crisis."

Today, GCFA attorney Mary Logan can see how the Pacific Homes case has had a
"huge impact" on the denomination. 

"First of all, the lawsuit cost millions of dollars to defend," she said.
"Second, it took thousands and thousands of human hours to work on the case.
Third, it scared annual conferences to such an extent that many changed the
structures of their affiliation with nursing homes, hospitals and other
organizations in a major way to distance themselves some more, which was a
sad practical necessity that changed, in a way, the ability of the church to
do its ministry in these affiliated relationships."

The case also caused the church's top legislative body, the General
Conference, to adopt legislation making clear that the United Methodist
Church is not a "jural" entity capable of suing and of being sued, Logan
said. "It in general made people in the church more afraid of litigation."
 
Though Pacific Homes was an ordeal for the church, Sano and Tuell see a
positive effect in the way that it united the denomination. And, of course,
it has brought a windfall two decades later.

"I'm hoping that a continuing sense of gratitude for the generosity of
people will really infuse whatever we do with this (money)," Sano said, "and
also a sense of wonder at the people who actually made it possible."
# # #
*Tanton is news editor for United Methodist News Service.

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United Methodist News Service
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