
Encompass CEO Monica Martinez speaks at a groundbreaking ceremony of an Encompass substance abuse and mental health treatment center in Watsonville in June. (Marcello Hutchinson-Trujillo — Santa Cruz Local file)
Why we wrote this story: Some Santa Cruz Local readers asked for more information about a 2019 lawsuit against Encompass and the role of CEO Monica Martinez. Some misinformation about the lawsuit also appeared on social media. Santa Cruz Local believes that voters should have accurate, nonpartisan information about Encompass and Martinez because she is running for Santa Cruz County supervisor.
Key takeaways
- In 2019, the Santa Cruz-based nonprofit Encompass Community Services and an affiliated nonprofit accused each other of financial mismanagement in related lawsuits.
- The nonprofits settled out of court in 2021 without a judge’s ruling on the allegations.
- Encompass CEO Monica Martinez is running for District 5 Santa Cruz County supervisor in the Nov. 5 election. Some of her critics have posted information about the lawsuit online to question her qualifications.
- A nonprofit expert who reviewed the lawsuit told Santa Cruz Local that Encompass did not necessarily act improperly.
SANTA CRUZ >> As voters prepare to cast ballots for District 5 Santa Cruz County supervisor, recent social media posts have resurfaced a 2019 lawsuit against Encompass Community Services. Encompass CEO Monica Martinez is running for District 5 supervisor.
Encompass was sued by a nonprofit that was created to support it over allegations of financial mismanagement. Encompass’ spending has outpaced its revenue during the past decade, but that is not uncommon for large nonprofits, some nonprofit leaders and experts said.
Read Santa Cruz Local's Election Guide
Jump to:
What was the lawsuit against Encompass?
Encompass Community Services has more than 400 employees and often contracts with the County of Santa Cruz to provide mental health programs and social services. It serves about 6,000 people annually through dozens of programs that include substance use counseling and rehabilitation centers, live-in mental health facilities and social services at county jails.
CFSC Inc. is a sister nonprofit created to buy property on behalf of Encompass and rent to the nonprofit and its clients. When CFSC was founded in 1981, organizations that accepted federal grants for client services like mental health support could not buy and rent property. CFSC has no employees and is governed by a volunteer board of directors. (The organization is not affiliated with the Community Foundation of Santa Cruz County.)
For decades, the two nonprofits worked in tandem. CFSC purchased land, rented it to Encompass and its clients, and hired Encompass as a property manager to process client rent payments and maintain financial records.
Martinez became CEO of Encompass in 2014. CFSC owns several properties, with some rented out to Encompass clients for permanent housing and others leased to Encompass for its programs.
By 2017, Encompass was spending several hundred thousand dollars more than it was bringing in each year, according to tax records. CFSC lent Encompass $750,000 in 2017, and Encompass defaulted on the loan later that year, CFSC Board President Stephen La Berge wrote in a court filing.
Encompass has “always kind of walked that fence of financial sustainability,” said Mimi Hall, former director of County of Santa Cruz’s Health Services Agency. That “is not unusual for nonprofits,” Hall said. Grants often do not cover the full cost of running a program, and some state money requires staff and expertise that many organizations don’t have, Hall said.
In June 2018, Encompass was seeking to pay off a $1 million bank loan. Encompass transferred itself $150,000 from CFSC’s bank account, allegedly without CFSC’s permission. After the CFSC board learned of the transfer, the two nonprofits negotiated an agreement to formalize the loan and lend another $850,000 to pay off the bank loan. CFSC’s board agreed to loan Encompass the money under specific conditions, La Berge wrote in court filings.
Encompass’ lawyer, Colin Pearce, proposed a different agreement. In an email to CFSC Board President La Berge, Pearce wrote that Encompass was “in desperate need” of money, and called the matter “immediate and urgent.”
What happened next became the subject of a four-year legal battle.
Multiple CFSC board members, including La Berge, wrote in court documents that CFSC rejected Encompass’ terms in a September 2018 board meeting and insisted that CFSC would only approve the loan under its preferred terms. Four days later, Encompass allegedly transferred $850,000 from a CFSC bank account to its own. Following the transfer, Pearce sent La Berge signed copies of Encompass’ preferred loan agreement, La Berge wrote.
Pearce wrote in court documents that Encompass signed the CFSC-approved loan agreement “with minor modification” before he transferred the money.
In April 2019, CFSC filed a civil suit in Santa Cruz County Superior Court for violation of the 2017 loan agreement, financial mismanagement and illegal transfer of the CFSC money. La Berge and other members of the CFSC board declined interviews with Santa Cruz Local.
Encompass leaders contended that the money wasn’t CFSC’s to withhold. As an organization created to support Encompass, CFSC was bound by its charter to make any funds available for Encompass’ mission, they wrote. For years, CFSC had “refused to use its funds and assets to support Encompass, in direct contravention of its Articles of Incorporation,” Martinez wrote in 2019 court documents.
“Over the past few years” the CFSC board had tried to “damage, prejudice and ‘punish’ Encompass and its social programs” with the intent to drive it into bankruptcy and then assume control of the organization’s finances, she wrote. “The actions of these hostile Board members have contributed to financial challenges faced by Encompass.”
In May 2019, Encompass filed a countersuit that essentially alleged financial mismanagement.
Records showed that Encompass was depositing some rent checks for CFSC-owned properties into Encompass bank accounts. Encompass Chief Financial Officer Kim Morrison alleged that CEO Monica Martinez had ordered Morrison to do so, according to transcripts of a 2020 deposition.
In 2021, the two nonprofits settled the suit. CFSC agreed to forgive a portion of Encompass’ total $1.75 million debt each year until it is cleared in 2026, according to a 2021 audit.
What has Monica Martinez said about the lawsuit?
Martinez compared the lawsuit to “siblings fighting over the family trust.”
CFSC and Encompass “were really at odds about who controls the decision making power,” Martinez said. “It was unfortunate that two volunteer boards both have the mandate to serve the public good, that they dug into their position so deeply that they ended up suing each other.”
In response to the allegations of financial wrongdoing, she said Encompass is “one of the most heavily audited nonprofits in the county.” Martinez said, “I think, really, our long standing record of clean audits and accreditations and licenses speaks for itself.” The legal battle is “behind us, and I’m glad that it’s behind us so we can all put our focus back on serving the public.”
“There’s nothing to hide,” she said. “There’s no secrets.”
While some critics have held Martinez personally responsible for the transfers from CFSC, the transfers were approved by the Encompass board of directors, she said. “My signature gets posted by the bank, but the board voted for that,” she said.
Because Martinez has a dual role as a board member of CFSC and and the CEO of Encompass, she did not “have authorization to make any decisions regarding the legal activities of either entity,” and recused herself from votes related to the lawsuit.
“I ended up in the middle of a lawsuit against myself,” she said.
What have Monica Martinez’s critics said about the lawsuit?
“We really have to question the ethics of Monica Martinez,” said Becky Steinbruner, a former supervisor candidate. Steinbruner blogged about the lawsuit in September under the headline “Should you trust this person to be your county supervisor?” Others separately posted on Facebook about it.
Steinbruner said in an interview, “I really am uncomfortable having a person like that leading our county. It’s not just the Fifth District, it’s the county.”
She added, “When someone is running for a public office, the public deserves to know information like this and to have the person involved explain themselves, so I think she needs to hold a press conference and publicly discuss with the public.”
What have nonprofit experts and Martinez said about Encompass’ finances?
Encompass’ declining assets do not necessarily indicate bad leadership or danger for the organization, according to two nonprofit experts who reviewed Encompass’ public tax filings. “I don’t think we would be able to know it without talking to somebody over there saying, ‘so what’s the backstory?’” said Geoff Green, CEO of the California Association of Nonprofits.
“I feel like if [Martinez] wasn’t their CEO in the time that I was there, they would have failed a long time ago,” said Hall, the former director of the county Health Services Agency.
Martinez said she plans to quit as CEO of Encompass if she is elected as a Santa Cruz County supervisor. She said she does not plan to recuse herself from votes related to Encompass.
The years of losses reflect “an underinvestment in behavioral health and services for those who are most vulnerable, really across the board — federal, state and local level,” Martinez said. “It should be no surprise that when the county is facing constraints, which it frequently is, that the largest provider of their behavioral health services would take the biggest hit.”
She said the organization approved a new strategic plan to become more financially sustainable, and finished the fiscal year in June at $400,000 in the black.
A nonprofit leader’s takeaways from the lawsuit
It’s common for one nonprofit to be created to help another, especially when affordable housing is involved, said Green, the California Association of Nonprofits CEO.
Sometimes those partnerships “work brilliantly, and I’ve seen other cases where you have the leadership of one organization at odds with the other,” he said. “It sounds like this has a little bit of that going on here.”
Based on a brief review of the case, “none of it looks like impropriety, bad actor kind of stuff to me,” Green said.
That the conflict escalated to a legal battle “doesn’t necessarily say impropriety,” Green said. “It may be that they got stuck, somebody thought they could do something, and then they later found out that those dollars were not fully theirs to control.”
Clarification: An earlier version of this story included an incorrect headline.
Questions or comments? Email [email protected]. Santa Cruz Local is supported by members, major donors, sponsors and grants for the general support of our newsroom. Our news judgments are made independently and not on the basis of donor support. Learn more about Santa Cruz Local and how we are funded.
Jesse Kathan is a staff reporter for Santa Cruz Local through the California Local News Fellowship. They hold a master's degree in science communications from UC Santa Cruz.