Circle of Greed Read online

  Nearly two decades later Witwer strode into San Diego with the air of a man accustomed to deference. He brought with him a mellifluous, authoritative-sounding basso profundo voice, the distinctive diction of a practiced orator, and an abundance of self-confidence.* “He was the only man I ever saw,” Bill Lerach said, “who could strut while sitting down.”

  Witwer harbored reciprocal feelings about Lerach. The first time he ever laid eyes on the younger man, Witwer and his attorney son Samuel W. Witwer, Jr., were checking into the Westgate Plaza Hotel, San Diego’s newest and finest, only to hear loud, whiskey-fueled cross-talk emanating from the lobby between Lerach and another lawyer they presumed to be Mel Weiss. “We’re going to take down the Methodist Church!” Lerach boasted. Public woofing was not typical behavior of the shining lights of the San Diego bar, but Lerach was not from that town.

  Born and raised in Pittsburgh, Bill Lerach was new to the West Coast; he liked California, had come to stay, and loved being in court on this case. He was thirty-one but appeared younger with his long blond curly hair, Sundance Kid mustache, round wire-rimmed glasses, and a suit that—although tailored—looked too large on his slender frame. He was easy to underestimate. As the Pacific Homes battle played out, Samuel Witwer and the rest of the nation’s corporate establishment came to see what they were up against. By dint of temperament and talent, William Shannon Lerach constituted a perfect instrument of destruction in an emerging hybrid of the legal profession: the superlawyers of the plaintiffs’ bar who viewed themselves as avenging angels for the little people cast on the slag heap of free enterprise. This theme would emerge more clearly in the years ahead; meanwhile the realization that in the process of attempting to reform American capitalism they could become quite rich did nothing to diminish their adversarial zeal. Quite the opposite, actually.

  THE SAN DIEGO CASE concerned a string of retirement facilities called Pacific Homes, established as a nonprofit corporation in 1929 for retired Methodist ministers and lay leaders. In the late 1970s the corporation was in financial trouble, a victim of the residents’ increasing life spans, the over-generous impulses of its founders, a flawed business plan, runaway inflation, and bad management—with some graft thrown in. The Methodist hierarchy bailed the homes out at first, but as the losses mounted, Pacific Homes’ officials resorted to acquiring more buildings and attracting new residents with “life-care contracts,” even as they spent the money paid up front by new retirees to keep the existing retirement facilities afloat. However well intentioned the Methodist elders had been originally, they eventually found themselves running an elaborate Ponzi scheme.

  The legal case began in 1977, when a Pacific Homes retiree named Frank Barr placed a call to a San Diego law firm, Wied & Granby, to which he had been referred by his estate planning attorney. Barr told the Wied & Granby attorneys his story: months after he had paid more than $300,000 for a “life-care contract,” Pacific Homes officials had announced that all residents would have to pay several hundred dollars more each month to keep the place afloat. The homes were near bankruptcy, it seemed to Barr, and the officials clearly had known this was the case even while soliciting the contracts. Barr told the attorneys, Colin W. Wied and James J. Granby, that some of the residents simply didn’t have additional income at their disposal and were worried about losing their homes.

  He had called the right lawyers. Wied and Granby were close friends who took the law, and their obligations under it, seriously. They were well situated, too, former U.S. Navy guys in a U.S. Navy town, with good educations and solid reputations in the city’s legal circles. Both would serve as president of the San Diego Bar Association, and Wied would later be named state bar president. Their only drawback was the size of their firm. Wied & Granby consisted essentially of Wied and Granby, along with a young associate, David J. Yardley. Nonetheless, intrigued by the case and indignant at the way their clients had been treated, they filed a lawsuit on behalf of the disgruntled Pacific Homes residents. Yet they soon realized—both because of the complexity of the case and because of the caliber of white-shoe law firms from Los Angeles, Chicago, and Philadelphia arrayed against them—that they needed a big gun of their own.

  Granby asked an attorney friend if he knew of anyone in Southern California with experience in class action litigation in which auditors had been negligent. “The firm that specializes in that kind of work is Milberg Weiss—and it has an office in San Diego,” the friend said. “They are the best in the country.”

  Granby placed a call to the San Diego office of Milberg, Weiss, Bershad & Specthrie, which was run by Bill Lerach. The two partners took an immediate liking to Lerach, who listened intently as they spelled out the facts of the Pacific Homes case. Lerach liked them well enough too; mainly he liked the looks of their case,* so a plan was made for all of them to go to New York to secure the blessing of Lerach’s boss, Milberg Weiss’s cofounder and senior partner, Melvyn I. Weiss.

  Weiss was initially dubious about a case that presented public relations challenges for a payoff that might not be that large. “Have you lost your mind?” Lerach remembers Weiss telling him. “We’re a bunch of Jews, and you’ve got us suing a Christian church! Keep doing your securities cases in federal court.”

  Lerach, who was not himself Jewish, was undeterred. Weiss often talked this way to his young partners as a way of making them defend their prospective cases so he could see how committed they were to the litigation. In truth, Mel Weiss was intrigued by Pacific Homes, and he encouraged Lerach to bring these California lawyers to New York so he could take their measure—and size up their case. Milberg Weiss’s New York offices were located at One Penn Plaza, atop Penn Station. When the lawyers gathered for lunch in the building’s lower level, the Californians were struck by how the tables shook and the plates rattled as the trains passed by below—and by how nothing seemed to rattle Mel Weiss.

  The next day they went over the case again. This time Weiss listened intently, saying little. Finally the senior partner said, “What do you want to do?”

  “Well,” Wied asked, “is it a good case or not?”

  After a ten-second pause, Weiss’s face broke into a slow smile. “It’s a dynamite case,” he replied.

  At that point the two law firms hashed out an agreement on the terms of their split, which they confirmed with a handshake: two-thirds of any contingency fee awarded the plaintiff’s lawyers would go to Milberg Weiss, one-third to Wied & Granby. The only thing left at that point was for this bicoastal legal team to take on the venerable United Methodist Church—and win.

  ON FEBRUARY 18, 1977, Pacific Homes sought to buy time by filing for Chapter 11 protection in federal bankruptcy court, while attorneys for the various Methodist entities responsible for the homes tried to restructure the residents’ contracts. The deal the church offered the residents was essentially this: the terms of the life-care contracts would be altered so that each resident would pay $350 per month for room and board—and $800 per month when they crossed the threshold into needing convalescent care. For its part, the church’s General Council on Finance and Administration would pony up $1 million a year for the next nine years. “The Annual Conference said the residents should pay a bit more because the life-care contracts were signed when there was no inflation,” Samuel Witwer explained to the press. “They [the Conference] offered the $9 million as a matter of Christian charity.”

  To make this bailout plan work, church lawyers told a federal bankruptcy judge, 93 percent of Pacific Homes residents would have to sign on to the deal. As 1977 wore on, 90 percent of the residents agreed, but church officials could not get that last 3 percent. They might have, had Lerach not intervened. As emotions among the residents boiled over, two warring factions emerged. The first were Wied and Granby’s “rebels,” who had become radicalized and who were quite willing to sue. The second and much larger faction, whom Lerach dubbed the “Tories,” remained devoted to the Methodist Church. Among the “Tory” loyalists, a pious an
d opinionated ringleader emerged. He was seventy-six years old and well-spoken, as befit his previous profession as a member of the U.S. Congress. His name was Jerry Voorhis.

  “There’s this old bird out there who’s causing us all kinds of problems,” junior attorney David Yardley told Lerach. “We’ve got to get him calmed down.”

  Lerach, recognizing Voorhis’s name, appointed himself to the task. A lifelong liberal Democrat, Voorhis would have been dismayed to hear himself labeled a Tory. A five-term member of the California delegation in the House of Representatives, Voorhis had been ousted from Congress by Richard Nixon in an acrimonious 1946 campaign in which the future vice president and president portrayed the Democratic incumbent as being under the thumb of Communist-controlled labor unions. Voorhis had indeed accepted campaign contributions from such unions, but he was a diligent public official who had once been named “the hardest working man in Congress.” Many years later political journalist Christopher Caldwell described him as an “upright Christian socialist” who was also “a sanctimonious know-it-all [who was] well to the left of his constituents.” Bill Lerach had no quarrel with Voorhis’s left-leaning politics—by then Lerach had become a Democrat himself—but he also found the former congressman hard-headed and haughty.

  “He was a know-it-all,” Lerach remembered. But he was also threatening to derail the Pacific Homes suit before it got off the ground and as such could not be ignored. “He’d had these run-ins with Yardley, but I sort of tried to charm him. I talked to him about what a bastard Nixon was. I just gave him a world-class ass-kiss.”

  Meanwhile the church’s lawyers persuaded the bankruptcy judge to move their status to Chapter X, a designation designed to further shield them; the move was granted, but it came too late. “The fat was really in the fire,” noted Methodist bishop Jack M. Tuell.

  “I wouldn’t ever want to see this come out in a courtroom, but we didn’t start to have these problems two years ago,” John Kirkman, church treasurer, told members of the Annual Conference who met in 1978 in Arizona. “We started to have them when someone said you can replace capital losses by borrowing and paying it back later. I don’t know of any financial enterprise that can operate that way but a chain letter.”

  It was a lesson the financial world would learn again and again over the next three decades—and as recently as March 2009, with the jailing of an extravagant thief with a Dickensian name, Bernard Madoff. In the case of Pacific Homes, Kirkman’s observations did indeed show up in court, because one Methodist who was not enamored with his church’s leadership sneaked a tape recorder into the Arizona meeting. Not that it was necessary. The Methodists and their lawyers were about to run into the buzz saw named Lerach. Before this case was over, he would present so much compelling evidence that the Methodists would sue for peace before they could even put on their first witness.

  THE CASE WAS ASSIGNED to Judge Ross G. Tharp, a folksy Ronald Reagan appointee with a handlebar mustache and a resemblance to the comedic actor Dabney Coleman. Tharp’s unease with the case was almost physical, and he did nothing to hide his discomfort at presiding over the lawsuit against a venerated Protestant denomination. The Methodists’ legal defense consisted of three lines of argument: the first was procedural, the second constitutional, and the third an assertion that was more a public policy position than a legal theory.

  Witwer and the defense team maintained that no matter what had transpired regarding the retirement facilities, the church wasn’t liable because it neither owned nor controlled Pacific Homes Corporation. The United Methodist Church, argued Allan Reniche, another member of the defense team, “is not the alter ego of Pacific Homes Corp. or anything or anyone else.” William “Beau” Miller III, another attorney representing the Methodists, asserted that Pacific Homes’ board, although composed of former Methodist pastors and officials, was “fiercely independent” of the mother church.

  The Methodists’ second line of defense flowed out of the first but went further. Legally speaking, their lawyers said, no liable body called the United Methodist Church existed. It wasn’t organized as a corporation in California or anywhere else and as such was not a judicial entity that could be sued. Methodism, according to its own internal ecclesiastic bylaws, was a spiritual “confederation” of like-minded parishioners; for that reason, taking money from one arm of Methodism to pay for the alleged misdeeds of another was not only grotesquely unfair but an unconstitutional assault on the freedom of religion. A contrary ruling “would substantially change the face of religion in America,” Witwer maintained. “It would violate every possible aspect of First Amendment rights of churches to conduct their business without harassment in civil court.”

  In one form or another, the church’s stated desire to go about its business without the “harassment” of plaintiffs’ lawyers or the courts was an argument that Bill Lerach would hear repeatedly from defendants—albeit usually large for-profit corporations—during the next three decades in his career as a litigator. Invariably, his answer would be to point, as he did in the Pacific Homes case, to the huge assets owned or controlled by the defendants—especially compared to the paltry resources of his little-guy clients. The United Methodist Church, Lerach emphasized, controlled some $7.5 billion in assets at the time when it was trying to abrogate the contracts of Pacific Homes’ retirees on fixed incomes.

  “Those $7.5 billion are the assets of 43,000 individual churches,” Witwer responded. “Each university, hospital, home is a separate institution that owns its own property. There is not property of fund, as such, that belongs to the UMC. You can’t structure an entity out of a confederation.”

  This reasoning led to Witwer’s last line of defense, a rationale that was more a public relations strategy than a legal philosophy: if the church were held liable for the financial collapse of Pacific Homes, money would be siphoned from other, even more worthy enterprises in the church’s mission, including clothing and feeding the poor. Moreover, church officials insisted, holding ecclesiastical groups liable for badly run businesses in their far-flung empires would have the effect of prompting faith-based organizations to abandon their work of helping society’s less fortunate.

  Tormented by this prospect, Tharp quietly urged the parties to settle the case. Although the judge didn’t like Lerach personally—he found the young lawyer arrogant, and his heart was more with the Methodists—he was impressed with Lerach’s pretrial preparation, and he thought the church’s lawyers were underestimating the effect the debonair young attorney might have on a jury.

  Tharp believed that if the case went to trial, the Methodists would be dunned for a huge verdict. And he feared that Witwer might be right about the effects of such an outcome. In other words, he worried that a precedent-setting case emanating from his California courtroom might cripple the ability of Methodism, or any other religious entity, to undertake its good works. To forestall such a result, Tharp pushed hard for a settlement—too hard, as it happened.

  On March 20, 1978, the judge issued a four-paragraph opinion removing the United Methodist Church as a defendant, while keeping the General Council on Finance and Administration (the Methodists’ finance body) in the lawsuit. Accepting Witwer’s assertion that the United Methodist Church was “a connectional structure maintained through a chain and series of conferences,” Tharp said that because it had never been legally incorporated, it could not be sued in a California court. “Methodism has continued for more than two centuries to proclaim a freedom of spirit as opposed to the bondage of an organization,” the judge wrote. He was quoting, he noted, from “a respected, unbiased source, The Encyclopedia Britannica.”

  “A contrary ruling,” he added, “would effectively destroy Methodism in this country, and would have a chilling effect on all churches and religious movements by inhibiting the free associations of persons of similar religious beliefs. If all members of a particular faith were to be held personally liable for the transgressions of their fellow churchmen, church p
ews would soon be empty and the pulpits of America silent.”

  Apprehensive that the appeals courts might disagree with his interpretation of the law as well as his apocalyptic vision, Tharp took the highly unorthodox step of attaching to the ruling a personal letter to the attorneys on each side. In this missive he said he believed that the suing residents had a strong claim and that the plaintiffs were likely to win “enormous” damages if the case went to trial. This gambit did not succeed. In seeking the middle ground, Tharp managed to alienate both sets of lawyers as well as the bankruptcy trustee representing Pacific Homes. Yet Tharp’s ruling made many of the residents jumpy—and some of the “rebels” urged their neighbors to take their chances with the Methodist authorities rather than the judicial system. Lerach was nervous, too, which explained his filing of a nearly identical suit in federal court in San Diego.

  Lerach needn’t have worried. His victories over the Methodists were only beginning.

  ONE YEAR LATER, on March 8, 1979, California’s Fourth Circuit Court of Appeal overturned Tharp’s order in a thorough reversal that left Lerach and his clients holding all the aces. A three-judge panel, in a decision written by a respected justice named Howard B. Wiener, concluded unanimously that the United Methodist Church’s legal claims to immunity were specious or, at the least, outdated. “To hold otherwise,” the justice wrote, “would permit an unincorporated association to escape liability by this simple technique of requiring express consent from all units of the association.”

  In their written opinion, the appellate justices expressed both disdain for Tharp’s decision to consult the encyclopedia and skepticism toward his assertion that an adverse decision would spell the end of Methodism in this country. They repudiated the trial judge, who was removed from the case, rejected the arguments of the church’s lawyers, and utterly embraced the legal premises advanced by Lerach.