United Methodists' Pacific Homes saga ends on an up note
9/10/1999 News media contact: Tim Tanton · (615) 742-5470 · Nashville, Tenn.
NOTE: Headshots are available with this story.
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."
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*Tanton is news editor for United Methodist News Service.
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