In the Matter of the Complaint Against:

ROBERT SMITH,
BEVERLY SMITH
d/b/a, NATIONAL
FINANCIAL SERVICES,
NFS, INCORPORATED,
2203 Maryland Avenue,
Baltimore, MD 21218-5881
and
P. O. Box 16040,
Baltimore, MD 21218-0040

P.S. Docket No. 34/170

04/30/92

Cohen, James A.

APPEARANCES FOR RESPONDENTS: Barnet D. Skolnik, Esq., Dennis P. McGlone, Esq., Whiteford, Taylor & Preston, Suite 1400, Seven Saint Paul Street, Baltimore, MD 21202-1626

APPEARANCES FOR COMPLAINANT: Jerry Belenker, Esq., Thomas V. Sottile, Esq., Consumer Protection Division, Law Department, Washington, DC 20260-1144

POSTAL SERVICE DECISION

Complainant, the General Counsel of the United States Postal Service, has filed an appeal from an Initial Decision of an Administrative Law Judge which dismissed a Complaint alleging Respondents are engaged in conducting a scheme or device for obtaining money or property through the mail by means of materially false representations in violation of 39 U.S.C. § 3005.

Background

The General Counsel initiated this proceeding by filing a Complaint, subsequently amended (hereafter referred to as the Complaint), alleging that Respondents solicit money or property through the mail by means of a collection notice which makes materially false representations in violation of 39 U.S.C. § 3005. Specifically, the Complaint alleges that Respondents falsely represent:

a) the amount listed on the notice is owed by the addressee to the 'Contest Newsletter' and has been referred to Respondents for collection; and

b) the recipient of the notice has subscribed to 'Contest Newsletter.'"

Respondents filed a timely Answer in which they admitted that National Financial Services, Inc. (NFS), a corporation, uses the collection notice attached to the Complaint and the notice makes the representations alleged by Complainant. Respondents, however, denied the representations made in their collection notice are materially false.

At a hearing before an Administrative Law Judge both parties called witnesses and introduced documentary evidence. Following the submission of proposed findings of fact and conclusions of law, the Administrative Law Judge issued an Initial Decision in which he concluded that Respondents made the representations alleged in the Complaint, but those representations were not materially false in violation of 39 U.S.C. § 3005. Complainant thereafter filed a timely appeal from the findings and conclusions of the Initial Decision. Respondents oppose the appeal.

The Promotion

The mailing which is the subject of this proceeding, is a collection notice sent by Respondent NFS to persons who had supposedly subscribed to the publication Contest Newsletter by responding to a solicitation distributed by its publisher, Park Avenue Publishing (hereafter Park Avenue). Respondent NFS is a collection agency which had contracted with Park Avenue in late 1988 to collect overdue accounts from such subscribers. NFS began collection efforts on the overdue Contest Newsletter accounts in December, 1988. In June, 1989, Respondents suspended collection efforts on Contest Newsletter accounts because of ongoing investigations concerning the subscriptions and complaints from recipients of the collection notice claiming they had not subscribed to the newsletter (Tr. 164-67).

A separate proceeding alleging that Park Avenue made false representations in its solicitation for Contest Newsletter was suspended after the parties entered into an Agreement Containing Consent Order to Cease and Desist (P.S. Docket No. 35/42).

Complainant's Exceptions

Complainant's exceptions on appeal relate primarily to the Administrative Law Judge's findings and conclusions pertaining to the relationship between Respondents and Park Avenue, and the alleged falsity of the representations made by Park Avenue in its solicitations for the publication Contest Newsletter. According to Complainant, Respondents should be held responsible for the false representations it contends are made in the Contest Newsletter solicitation. Specifically, Complainant contends the Administrative Law Judge erred in finding that recipients of the solicitation for Contest Newsletter were subscribers to that publication (Findings of Fact (FOF) 6 & 22-24). Complainant also contends the Administrative Law Judge erred in finding that Respondents had no knowledge of, and were not participants in, the creation of the Contest Newsletter solicitation (FOF ¶ 25), that it failed to prove Respondents were liable for any false representation which may have been made in the solicitation for Contest Newsletter (Conclusions of Law (COL) ¶ 3), and finally, that it failed to prove Respondents' collection notice and the Contest Newsletter solicitation should be considered as a whole (COL 4). None of Complainant's exceptions have merit. While some subscribers to Contest Newsletter may have been misled by the Park Avenue solicitation, they were nonetheless subscribers who had not repudiated their agreement to subscribe, nor paid the subscription fees. Thus, the Administrative Law Judge correctly found that recipients of Respondent's collection notice were subscribers who had not paid the subscription fees.

A subscription induced by a false representation is voidable and, unless avoided by the subscriber, imposes a duty on the subscriber to pay the subscription fees. See FDIC v. Aetna Cas. & Sur. Co., 947 F.2d 196, 203 (6th Cir. 1991); Pacific Architects & Eng'g Inc. v. United States, 491 F.2d 734, 742-43 (Ct. Cl. 1974); Soderberg v. Gens, 652 F. Supp. 560, 565 (N.D. Ill. 1987); Levin V. Garfinkle, 492 F. Supp. 781, 801 (E.D. Penn. 1980), aff'd, 667 F.2d 381 (3rd. Cir. 1981). Evidence of avoidance by subscribers has not been presented by Complainant except to the extent complaints were received. Follow-up collection notices were not sent to complaining subscribers (Tr. 142-45).

Contrary to Complainant's assertion, Respondents' evidence of the ratio of complaints to collection notices was properly admitted into the record. See Finderhood, Inc., P.S. Docket No. 34/102 at 12-13 (P.S.D. March 20, 1992).

The Administrative Law Judge also correctly found that Respondents had no knowledge of, and were not participants in, the creation or distribution of the solicitation for Contest Newsletter. Although Complainant appears to concede that this finding is accurate, it nonetheless contends the finding is irrelevant because innocent misrepresentations may constitute a scheme within the meaning of 39 U.S.C. § 3005.

While intent to deceive is not an element of a § 3005 violation, knowledge and participation by a third party who has entered into an arms-length contractual relationship with the promoter of a scheme is clearly relevant to determining whether that third party is engaged in conducting a scheme within the meaning of 39 U.S.C. § 3005. Complainant's reliance on Peoria Scale Service, P.S. Docket No. 14/31 (P.S.D. Dec. 27, 1983) and National Gold Mint, P.S. Docket No. 22/165 (P.S.D. May 1, 1987, recon. denied, Sept. 30, 1987), to support a contrary conclusion is misplaced. In Peoria the innocent misrepresentations were made by the promoter of the scheme and no third parties were involved. National Gold Mint concerned parties who were active participants in the mail order scheme and were not, as here, arms-length contractors who did not participate in the promotion or have knowledge of any of the false representations which may have been made. Thus, neither case supports Complainant's contention.

The Administrative Law Judge also properly concluded that Complainant failed to establish any valid rationale for considering the collection notice and the Contest Newsletter solicitation as a whole. The record establishes that Respondents' collection notice and the promotional materials for Contest Newsletter were separate and distinct mailings by two separate and unrelated entities creating significantly different rights, responsibilities and liabilities.

Finally, the Administrative Law Judge correctly concluded that Complainant did not prove Respondents were liable for any false representations which may have been made in the Contest Newsletter solicitation. Absent any involvement in the scheme other than performing their collection responsibilities in accordance with the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. under an arms-length contract with Park Avenue, Respondents cannot be held liable for false representations which may have been included in the Contest Newsletter solicitation.

See Howe v. Reader's Digest, 686 F. Supp. 461, 467 (S.D.N.Y 1988) (holding that a collection agency may not be held liable for misrepresentations of a debt where it reasonably relies on delinquent subscriber information provided by a publisher.)

Accordingly, Complainant's appeal is denied and the dismissal of the Complaint against Respondents is affirmed.

Cohen, James A.
Judicial Officer