THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, October 30, 1995 TAG: 9510300033
SECTION: LOCAL PAGE: B1 EDITION: FINAL
SOURCE: BY MARC DAVIS, STAFF WRITER
DATELINE: NORFOLK LENGTH: Long : 179 lines
In 1991, Joseph and Judy Houska were broke. They lived in a million-dollar waterfront home in Virginia Beach, but they also had $15 million in debts.
So they filed for bankruptcy. They listed $13,390 in household belongings, including $500 worth of used furniture in the garage.
A year later, when their home in Birdneck Point burned down, the Houskas claimed that the same garage furniture was worth much, much more - $37,815, according to their insurance claim.
What's wrong with this picture?
Maybe nothing, according to the arcane and amorphous rules of Bankruptcy Court.
Today, a jury will decide whether the Houskas committed bankruptcy fraud when they listed their personal belongings on a 1991 court form.
For five days last week, the jurors heard bankruptcy lawyers and others explain the seemingly unexplainable - a system that encourages debtors to list ridiculously low values for their property in bankruptcy, then encourages them to list absurdly high values for the same property in insurance claims.
It is a system, according to testimony, that requires almost no detail at all in bankruptcy forms, but excruciating detail in insurance forms.
The result, for the Houskas, was two sets of forms that seemed to contradict each other.
One set was prepared for Bankruptcy Court. It made them appear to be paupers. Another set was prepared for insurance companies after the fire. It made them appear to be millionaires.
The insurance form listed every item owned by the Houskas, regardless of its worth, and the replacement value. One pizza cutter, $10. Four baseball caps, $40. One chandelier, $11,000. One Persian rug, $12,000.
The bankruptcy form lumped possessions into big categories, some with no detail at all, valued at yard-sale prices. Wearing apparel, $1,000. Miscellaneous rugs, $1,000. Garage full of miscellaneous used furniture, $500.
Did the Houskas simply do what their lawyers told them to do? Or did they take advantage of the system by hiding their belongings in bankruptcy? The jury must decide.
One courtroom exchange Thursday between prosecutor Alan Salsbury and witness Joseph Houska summed up the case.
``Isn't it extremely obvious to you,'' Salsbury asked, ``that the handwritten list you prepared for Schedule B (of the bankruptcy form) was so minimal . . . it would cause no creditor to come out and look at your house?''
``No, sir,'' Houska replied, ``I don't believe that. That's not the reason it was done. . . The list represents my best effort to do what my attorney told me to do at the time.''
Prosecutors don't buy it.
``This is a case about deception and fraud,'' Salsbury told jurors in an opening statement Monday. ``The defendants concealed from their creditors and the (bankruptcy) trustee . . . literally hundreds and hundreds of items of personal property, some of them very valuable, including art objects, antiques and jewelry.''
Judy Houska insisted otherwise.
``I thought I was doing everything I was supposed to do according to the advice of my bankruptcy attorneys. . . ,'' she testified. ``These are the people I've hired to tell me, because I'm only a housewife.''
Joseph Houska was the ``H'' in PHP Enterprises, a construction company he owned with brothers-in-law George Powell and Shelby Pallette.
The company built hotels, shopping centers, condominiums and storage units. For a while in the 1980s, PHP thrived. Houska, the son of a builder, built his family an elegant home on Linkhorn Bay.
Then the recession hit. The Houskas filed for personal Chapter 11 reorganization in Bankruptcy Court in August 1991. Later, it was converted to a Chapter 7 liquidation.
In September 1991, the Houskas filed in court a list of everything they owned. It took less than a day to compile.
``We did as we were told to do. We wrote down the major items in each room,'' Joseph Houska testified. ``I was never told to do an itemized list, room by room, ever. . . There was never any comment that there was anything wrong with the list.''
Lawyers told the Houskas how to value their belongings for Bankruptcy Court: Assume everything has to be sold, that day, on the front lawn. Pure liquidation. What would it fetch?
Using that formula, the Houskas arrived at a figure: $1,000 for clothes, $9,440 for household goods and furnishings, $750 for two fur coats, $2,000 for jewelry.
The major items were listed in three handwritten pages, by room. Another handwritten page listed 16 pieces of furniture held for Joseph Houska's mother. The Houskas valued it at $4,225.
There was never any question of using greater detail, the Houskas testified. That's just how it's done in Bankruptcy Court.
``I've never seen a bankruptcy petition that lists every knife and fork and everything else in the household,'' said Steven L. Brown, a Norfolk bankruptcy lawyer who testified as an expert for the Houskas. ``I think the material assets were listed and there was material disclosure.''
Then the Houskas' house burned down in August 1992. They lost everything.
Once again, the Houskas had to list all their possessions, this time for the insurance companies. A very different list emerged.
This time, the Houskas hired an insurance adjuster - their own, not the insurance companies' - to help list and value their property. He led them mentally through every room of the house, every drawer, every closet, over and over and over.
``It was a very arduous task, a very emotional task,'' Judy Houska testified, teary-eyed. ``It would go on and on. I was so sick of the thing. .
Karl Dennison, the insurance adjuster, explained, ``The insurance company wants to know each and every item.''
Dennison also helped value the property. He looked through catalogs and hunted through stores to find items of matching quality. The insurance companies would pay ``replacement value'' - what it costs to buy each item new, no matter how old it was when it burned.
Three times the Houskas valued their household belongings. First, it came to $479,725. Then $695,366. Finally, they settled on $647,350.
To date, the Houskas have not been paid on their claim. Two insurance companies have challenged its validity, and a federal lawsuit is pending.
The Houskas said they were surprised at the final insurance figure. Dennison was not.
``Invariably,'' he testified, ``insureds underestimate the value of their property. They forget what they have. I don't know why, but everyone undervalues their property.''
The result was two lists, very different.
The bankruptcy list, for example, includes one handwritten line, ``Garage full of misc. used furniture $500.'' There is no detail. That's it.
The furniture, the Houskas testified, was mostly old stuff from Joseph Houska's grandmother and late sister. After the bankruptcy was filed, much of that furniture was moved around the house, then destroyed in the fire.
Each piece is listed, individually, in the insurance inventory, room by room.
One piece, for example, is an antique reproduction bachelor's chest. It was valued originally at $22,000 for insurance purposes, then lowered in the final inventory to $9,440. It was in the master bedroom.
Another piece was a mahogany lowboy, a small dresser. It was in a daughter's bedroom, valued at $8,095.
Some pieces were moved to the attic - for example, four antique Queen Anne side chairs valued at $6,000.
Joseph Houska testified about each piece that was moved from the garage to somewhere else in the house. All together, that used furniture, originally valued for bankruptcy at $500, was valued for the insurance claim at $37,815, using replacement value. None of it was listed individually in the bankruptcy.
Salsbury, the prosecutor, challenged the propriety of this listing.
``Would you agree,'' he asked Brown, the Houskas' expert witness, ``that expensive pieces of furniture should not be thrown in categories of `Miscellaneous Furniture in the Garage'?''
``I have seen it done that way,'' Brown replied.
Again, Salsbury challenged Brown.
``Tell this jury,'' Salisbury said, ``which item on this handwritten list is the antique reproduction bachelor's chest valued for replacement (in the earlier inventory) at $22,000. Tell us which it it is.''
Brown could not. ``This may have been one of those items not listed on here,'' he said.
Earlier, a staff lawyer with the U.S. Trustee's Office, which oversees bankruptcies, testified on how bankruptcy papers should be filed.
``To be completely and utterly correct,'' Robert Van Arsdale testified, ``you would list all the forks and spoons you have.''
But when defense attorney Andrew M. Sacks asked how many people really do it that way, Van Arsdale replied, ``None.''
``Nobody comes in with that kind of specificity, do they?'' Sacks asked.
``No,'' the witness replied.
In the end, it may come down to credibility. Will the jury believe that Joseph and Judy Houska disclosed many expensive pieces of furniture in their bankruptcy file under general headings of ``Misc. Rugs'' and ``Misc. Items''?
The Houskas insisted that they did not intend to deceive anyone, that they simply followed the dictates of a bizarre bankruptcy system that they did not completely understand.
``I don't see any improprieties,'' said Brown, the Houskas' expert witness. ``There were a couple of items that probably should have been listed (separately). . . But it's very common that people do not list all of the assets they should have listed.'' ILLUSTRATION: ALBA BRAGOLI
Joseph and Judy Houska look like paupers in bankruptcy papers and
like millionaires in ones done for their insurers.
GARAGE ITEMS
Total insurance claim: $37,815
Total bankruptcy value: $500
KEYWORDS: FRAUD TRIAL BANKRUPTCY by CNB