That's one thing that I didn't do. What I had tried is setting the owner to root (rw), the group to nobody (r) and assigning read only permissions to everyone - exactly as the admin manual states. I never thought of checking the permissions on the local users folder and copying the permisisons.
The strange behavior that occured is that when I logged in as the "test" user, I would get the error and the dock icons would be messed up - but I couldn't see anything in the SCSI drive. If I tried to navigate to it in the finder, but it appeared as if it were completely empty. Then I logged out, logged in as root and looked in the alternate /Users (called MMUsers) in the SCSI drive. The typical folder was in there for "test" with the correct permissions on it. No obvious reason for any problems.
I even tried relocating a current users home directory to the new folder. As soon as I achanges it from the Server Admin program, I experienced the same problems as the "test" user. When I changed the home directory back to the local volume, things worked fine.
I am wondering if this is something that I am doing, or it's a system level bug. I have another machine that I am going to test on today.