In the Matter of the Complaint Against

JAMES E. SMITH INNOVATION ASSOCIATES, INC.
Post Office Box 25546
at Honolulu, Hawaii 96825

P.S. Docket No. 14/61;

01/11/83

Duvall, William A.

APPEARANCE FOR COMPLAINANT:
Thomas A. Ziebarth, Esq.
Consumer Protection Division
Law Department
United States Postal Service
Washington, DC 20260

APPEARANCE FOR RESPONDENT:
James E. Smith, President and Proprietor
Innovation Associates, Inc.
Post Office Box 25546
Honolulu, Hawaii 96825

INITIAL DECISION

On September 9, 1982, the General Counsel, United States Postal Service (Complainant), acting through the Consumer Protection Division, filed a Complaint in which it is alleged that James E. Smith, using his own name and the name Innovation Associates, Inc., (among others) Post Office Box 25546, Honolulu, Hawaii 96825 (hereinafter sometimes called Respondent), is engaged in a scheme or device for obtaining property through the mails by means of false representations in violation of 39 U.S.C. § 3005.

Complainant alleges that Respondent submits orders to businesses in various parts of the country soliciting the sending of merchandise to him through the mails to the aforesaid Post Office Box.

Complainant alleges, also, that an order so placed is accompanied by a personal check in the amount of the purchase price, including the mailing and handling costs when applicable. The checks, it is alleged, are regularly drawn on nonexistent bank accounts or on accounts that have been closed.

In paragraph number 3 of the Complaint it is alleged that by means of such orders and checks and similar materials Respondent, directly or indirectly, in substance and effect, whether by affirmative statements, implication or omission, makes the following representations:

"(a) He has an active checking account at the bank on which the check was drawn bearing the account number set forth on the face of the check;

"(b) There are sufficient funds in the account to cover the amount for which the check was drawn; and

"(c) The check will be honored by the bank on which it was drawn."

Finally, Complainant alleges that the aforesaid representations are materially false as a matter of fact.

In a timely Answer, Respondent denied all of the allegations of the Complaint. Affirmatively, Respondent alleged that Complainant, in violation of the Fifth Amendment to the Constitution, is seeking to deprive Respondent of the right to use the mails; that 39 U.S.C. § 3005(a)(1) and (2) are violative of the Constitution; that "Complaintants" are in violation of 18 U.S.C. 241 for conspiring to injure, oppress, threaten or intimidate the Respondent; that the Complaint is frivolous; and that he is willing to reimburse any person who validly claims to have been injured financially by Respondent's activities. In the remainder of the Answer, there are references to predicted societal changes which will include automation of the labor force and changes in communicative abilities and the monetary system.

Respondent moved that the hearing be held in Honolulu, and he stated that without such transfer of the hearing he would be unable to present as witnesses, in addition to himself, two persons identified as judges of State Courts of Hawaii, a United States Postal Inspector, and perhaps others. The Motion was granted and the matter came on for hearing in Honolulu on December 2, 1982.

The first (and only) witness called to testify by the Complainant was Postal Inspector Michael John Bollie, whose business address is Post Office Box 30309, Honolulu, HI 96820. In the course of his duties of investigating postal crimes and postal law violations of a non-criminal nature, the activities of the Respondent came to the Inspector's attention. Mail order companies began to write letters of complaint to the Postal Inspection Service, which letters were either directed or routed to Inspector Bollie. In these letters it was related that the companies had received an order or orders accompanied by checks from Mr. Smith. The companies stated that they mailed merchandise in response to the orders but that the checks would be returned stamped "account closed" or a similar notation. (Tr. 15-17)

Inspector Bollie identified a copy of a Postal Service Form 1093, which is an Application for Post Office Box or Caller Number. (CX-1) The form is dated December 7, 1979; it relates to

Box Number 25546, Honolulu, HI 96825; it is signed "J. E. Smith"; and, in addition to Mr. Smith's name, the name "Y. Ryan" is shown on the form. Mail addressed to Innovation Associates, Inc. is also received at that box. (Tr. 16-18)

The following names appear, among perhaps other places, in the Complainant's exhibits shown opposite their names:

NAME EXHIBIT(S)

Y. Ryan CX 10-2

Yakima Ryan CX 4-15

Innovation Associates, Inc. CX 18-1, 22-1, 23-5, 24-3

Evidence illustrative of the manner in which Respondent dealt with various mail order houses is found in CX 12-1, -2, and -3. CX 12-1 is a letter dated February 26, 1982, from the firm Karl Bissinger, St. Louis, MO, telling of the receipt and filling of orders from the Respondent. The check that accompanied this order and two similar ones totaled in the aggregate $834.25. When the checks were presented for payment, checks numbered 246 ($424.00) and 465 ($201.25) were stamped to indicate that they were "not paid" because "A/C closed." In the letter from Bissinger, it is stated that the third check (#250, for $209.00) was not paid for the same reason, aothough it is not so indicated on the check. In this exhibit it is shown that Respondent wrote checks payable to Karl Bissinger's on two accounts: one in the Bank of America San Francisco Main Office 33, 343 Montgomery St., San Francisco, CA 94104; ^1/ and the other in American Savings, Waikiki Office, 2201 Kalakaua Ave., Honolulu, Hawaii 96815. Exhibit CX 2/2 contains checks drawn by Mr. Smith on the Bank of Hawaii, 2220 Kalakaua Avenue, Honolulu, Hawaii 96815, and he stated that he wouldn't be surprised if he "had a whole lot of accounts" in the San Francisco main office of the Bank of America. (Tr. 111)

Mr. Smith's handling of his bank accounts is best described as shown in the following excerpt from Inspector Bollie's testimony:

A Two of them accounts were opened with $50. Two accounts were --the first one I testified to, that was opened with $10 and he withdrew $9 the next day, the American Savings account, Waikiki Branch. That was opened 11/4/81 with $10 deposited and on 11/5/81 he withdrew $9 and the checks started coming in. They closed it shortly after. Mr. Smith was notified on 12/1/81.

The next account was the Bank of Hawaii account. That was opened on August 16th, 1977. That one was closed on 3/21/78 because of overdrafts.

The next one is the Bank of America, San Francisco and that was opened on June 10th, 1981, and closed on July 14th, 1981, because of overdrafts. That was opened with a $50 deposit.

The next one is also a Bank of America account which was opened on February 9th, 1981, and closed on July 14th, 1981, because of overdrafts.

Q. Is it one or the other of these accounts that provided the checks that were used for the --or provided the checks that was the subject of the complaints received?

A. They were. (Tr. 68)

Mr. Smith was asked about this on cross-examination in the following exchange (Tr. 103):

Q. Is it not true that you opened up an account with $10.00, withdrew $9.00 the following day in Hawaii and continued to write checks on that account?

A. That is not a true representation of fact.

Q. Would you please correct it then?

A. As I recall I opened that account with $50 or $100, I don't recall, and then I withdrew it down to $9 or $10 and then wrote checks on that account.

Mr. Smith suggested that it would be easy to forge the evidence with a signature stamp or an "account closed" stamp though he never actually alleged that this was done. On crossexamination he was asked (Tr. 105-106):

Q. Mr. Smith, referring again to our Exhibits 2-27, are any of these copies of checks which you purport or contend are forgeries or which were not sent by you to the companies in question for merchandise?

A. I do not deny that all of those names, at least as I see them, are people that I have at some previous time solicited business from, supplies or services or whatever.

Q. And you received these supplies...?

A. And in some cases trying to sell them things.

Q. All right, but confining it to where you sought merchandise from them and you received this merchandise did you not?

A. And it's very likely that I've done some with the use of paper, and we'll call it checks, we'll call it promissory notes or call it whatever you want to call it.

The business dealings of the Respondent with Bissinger's as reflected in Exhibits CX 12-1, -2 and -3 are typical of his dealings with the other businesses appearing in CX 2 - CX 11 and CX 13 - CX 27 and their sub-exhibits. The earliest transaction recorded in the exhibits in this case is a check dated July 14, 1979 (CX 2/2), and the most recent date on one of Respondent's checks is October 15, 1982 (CX 26-3). The record indicates either that each such check is unpaid or that the account is closed, or both.

CX 28 is a summary of 46 orders placed by Respondent that came to the Inspector's attention relating to the period from June 10, 1981 through August 14, 1982. This exhibit shows that during this 14 1/2 months period, Mr. Smith ordered $12,234.94 of merchandise, and that goods worth $6,277.13 were shipped to him, for which no payment was made. It will be noted from CX 28 that many sellers received multiple orders from Respondent for goods that were supplied, but for which payment was not made. (Tr. 64) Usually, after one or two instances of receiving notification that accounts had been closed, the suppliers stopped accepting the checks and shipping the merchandise (id.). Exhibit CX 28 relates to transactions shown in CX 2 through CX 18 and a portion of CX 23.

Complainant's Exhibit 29 is a summary of 7 additional orders having a total dollar value of $1,129.05. Of this total, merchandise having a value of $971.55 was actually shipped. This exhibit includes the transactions shown in the remainder of CX 23 and in CX 24 through CX 27. One of these orders was placed more than a month after the Complaint was filed.

Complainant's Exhibits 19 through 22 show twelve additional transactions showing orders totaling $674.75 and actual shipments valued at $384.75.

The exhibits in evidence show that Mr. Smith has attempted to obtain merchandise through the mail with a total value of $14,038.74, as follows:

$12,234.94 (CX-28)

1,129.05 (CX-29)

674.75 (CX-19 through 22)

$14,038.74 TOTAL

Of this amount merchandise with a total value of $7,633.43 was actually shipped to Mr. Smith either in his own name or in the name of Innovation Associates, Inc., as follows:

$ 6,277.13 (CX-28)

971.55 (CX-29)

384.75 (CX-19 through 22)

$ 7,633.43 TOTAL

In addition to the documentary material received in evidence, Inspector Bollie interviewed Mr. Smith on May 11, 1982. Mr. Smith was advised of the complaints that had been received regarding his use of checks written on closed bank accounts. He did not deny the use of these checks but, instead, typed out a short note indicating that all matters would be taken care of in due course. He asked that copies of this note be furnished to the complaining companies. Mr. Smith freely acknowledged that the checks were his (Tr. 66).

In his presentation of Respondent's defense, Mr. Smith, who stated in his Answer to the Complaint (Ans. p. 3, lines 4 and 5) that he is a licensed attorney, said that he was not trying to "run out on anybody's debt." (Tr. 78) This attitude is commendable but it has a number of flaws, some of which are as follows: (1) it was expressed in the course of Inspector Bollie's May 11, 1982, interview of Mr. Smith and, hence, it came rather late in Mr. Smith's operations; (2) the sincerity of the expression is put in the gravest doubt by Respondent's dealings with mail order houses subsequent to the time of the making of the statement; and (3) whatever may have been, and is, Mr. Smith's intent relative to payment for goods ordered, since the October 17, 1968, amendment of the statute such intent has been irrelevant to the charges in the instant Complaint.

The remainder of Mr. Smith's defense consisted of some novel ideas, only one of which will be explained in any detail. One or two others will be mentioned in order to convey their full flavor. Mr. Smith asserted that he has designed a new system which is a "social system, a system of government, a system of political control, a system of accounting" and a system of payments. One feature of the new system might be to regard the time required to fill out an order for merchandise as being worth as much or more than the merchandise itself, and time thus spent by the buyer, therefore would constitute compensation to the seller. (Tr. 80-81) A different concept of the new system was likened to a "decision tree" which is "controlled by the intellegentsia and controlled through the intellegentsia back through the spokesman, the actives or bosses in the system of government we know and in the incorporate world, then down to the doers, movers and shakers, and from them down to the labor force that actually move and actually construct." (Tr. 81-82) Here, it must be said that if a new societal system or organization is to come into existence, until such time arrives, conventional patterns, relationships, rules and laws must govern. Practicality demands the use of known and generally accepted tools, procedures, and practices.

Two other matters were among those discussed by Mr. Smith. One was a system of communication involving the transmission of information, and perhaps documents, through the power of brain waves without the intervention of mechanical or other equipment. (Tr. 87, 94) The second idea, and the last to be mentioned here, is Mr. Smith's suggestion, mentioned in his Answer (p. 2, last par., lines 10-12; p. 3, last par., lines 17-22) and his testimony (Tr. 25, 52-53, 92-93) that he feels that his business methods are beneficial to the companies because the companies from which he orders and receives, but which he does not pay for merchandise, must necessarily improve their practices by assuring themselves that their customers checks will be honored before merchandise is shipped. Such companies are required, also, to improve their accounting systems, and for this he should be thanked.

FINDINGS OF FACT

1. In conducting the affairs which are the subject of this proceeding, Respondent uses the United States mails.

2. By conducting his affairs in the manner herein described, Respondent makes the representations set forth in paragraph 3 of the Complaint.

3. The representations made by Respondent are material representations in that their natural effect is to cause mail order merchandisers to send the ordered goods to Respondent upon receipt of the order. The evidence of record abundantly establishes this finding.

4. The representations made by Respondent are false as to material matters of fact.

CONCLUSIONS OF LAW

1. In determining the meaning of writings, they are to be considered as a whole and their meaning is to be determined by the effect the language employed has upon persons of ordinary minds. Express and implied representations are to be considered in making the determination. Donaldson v. Read Magazine, Inc., 333 U.S. 178 (1948); Borg-Johnson Electronics, Inc. v. Christenberry, 169 F. Supp. 746 (S.D.N.Y., 1959).

2. False advertising representations are not protected by the freedom of speech guarantees of the First Amendment to the Constitution of the United States. Lynch v. Blount, 330 F. Supp. 689

(S.D.N.Y., 1971), aff'd. 404 U.S. 1007 (1972); Virginia State Board of Pharmacy v. Virginia Citizens Council, 425 U.S. 748 (1976).

3. The Court of Appeals for the Second Circuit in considering the constitutionality of 39 U. S. Code Section 3005 stated:

"The constitutionality of 39 U.S.C. § 3005, the procedures here employed, and the remedies here instituted cannot be doubted. See Lynch v. Blount, 330 F. Supp. 689 (S.D.N.Y. 1971) (three judge court), aff'd, 404 U.S. 1007 (1972). See also United States v. Outpost Development Corp., 369 F. Supp. 399 (D.C. Cal.) (three judge court), aff'd, 414 U.S. 1105 (1973). The recent Supreme Court decision of Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976), does not require a contrary result. See 425 U.S. at 771: 'Untruthful speech, commercial or otherwise, has never been protected for its own sake.' See also Friedman v. Rogers, 47 U.S.L.W. 4151, 4153-54 (U.S. Feb. 21, 1979). That the corporations' Due Process and First Amendment rights were not violated is made clear by Reilly v. Pinkus, 338 U.S. 269." Original Cosmetics Products, Inc. and Love Song Cosmetics Corp. v. Strachan, 459 F. Supp. 496 (S.D.N.Y., 1978); aff'd. 603 F.2d 214 (2d Cir., 1979); cert. den. Oct. 15, 1979, 444 U.S. 915.

As in the cited case, it is clear Respondent's Due Process and First Amendment rights were not violated in this case.

4. The Respondent is engaged in conducting a scheme or device for obtaining money or property through the mails by means of materially false representations within the meaning of 39 U. S. Code § 3005.

Proposed findings of fact and conclusions of law submitted by the parties have been fully considered, and to the extent indicated herein, they have been adopted. Otherwise, such proposed findings of fact and conclusions of law are rejected for the reasons that they are unsupported by or contrary to the evidence or because of their immateriality, incompetence, or irrelevance.

An order, substantially in the form attached, should be issued against James E. Smith and Innovation Associates, Inc.

1/ This check is numbered 195, dated February 12, 1982, in the amount of $156.25, and stamped "Return to Bank" and "CLOSED."