PSBCA No. 3951
February 17, 1998
Appeal of
THE GENERAL STORE
Under Contract No. 059991-92-P-0081
PSBCA No. 3951
APPEARANCE FOR APPELLANT:
Thomas M. Witte, Esq.
APPEARANCE FOR RESPONDENT:
Elena V. Alejandre, Esq.
OPINION OF THE BOARD
Appellant, The General Store, has appealed the termination of its contract to operate a contract postal unit for Respondent, United States Postal Service, and Respondent’s assertion of a claim against it for an alleged shortage discovered in the unit’s financial accounts.
A hearing was held at which Respondent presented its case through documents and the testimony of witnesses. Citing concerns that its owner and employees might be subject to criminal prosecution on account of the large shortage claimed by Respondent, Appellant chose to present no testimony of witnesses. Appellant’s counsel vigorously cross-examined Respondent’s witnesses, and Appellant presented documents it had obtained from Respondent in discovery. At the conclusion of the hearing the record was left open, and Appellant was allowed an opportunity to explore immunity or other arrangements that it felt might allow it to present witnesses in its defense. Within two weeks after the conclusion of the hearing, Appellant’s counsel advised that Appellant did not intend to offer any further evidence and that the matter could proceed to decision. The parties had made oral summations at the hearing and submitted written briefs after the record was closed.
FINDINGS OF FACT
1. On October 5, 1991, Respondent awarded Appellant a contract to operate a contract postal unit (“CPU”) at its delicatessen known as The General Store in Sacramento, California (Appeal File, Tab (“AF”) 1; Stipulation dated March 14, 1997, paragraph (“Stip.”) 1).
2. Under the contract, Appellant was to provide postal services to the public, including the sale of stamps, meter postage and money orders. Respondent received the proceeds of the CPU’s sales and paid Appellant $24,000 per year for operating the CPU (AF 1, 4).
3. The contract was for an indefinite term, but it provided for termination of the contract by either party:
“This contract may be terminated by either the Postal Service contracting officer or the contractor upon 60 days’ written notice. The contracting officer may terminate the contract upon one day’s notice if necessary to protect the Postal Service’s interest.” (AF 2, Contract Clause C.1, CONTRACT DURATION AND TERMINATION (CONTRACT POSTAL UNIT) (Clause OB-490) (June 1988); Stip. 4).
The contract also included the Postal Service standard Claims and Disputes Clause, which defines a claim as including a written assertion seeking “the adjustment or interpretation of contract terms“ (AF 2, Contract Clause H.5, CLAIMS AND DISPUTES (Clause B-9) (June 1988)).
4. The contract provided for appointment of a contracting officer’s representative who would serve as the contact point on routine matters (Tr. 36) and conduct periodic inspections:
“The contracting officer’s representative (COR) will periodically inspect the contractor’s performance to make sure that it is in accordance with the contract. The COR will immediately notify the contracting officer if the work is unsatisfactory. If the contractor continues to perform unsatisfactorily, the contracting officer will notify the contractor in writing to correct the deficiencies; if uncorrected, the Postal Service may terminate the contract.” (AF 2, Contract Clause E.2, INSPECTION OF WORK (CONTRACT POSTAL UNIT) (Clause OB-494) (June 1988); Tr. 35, 41; Stip. 5).
Additionally, the contract allowed, but did not require, the examination of Appellant’s “pertinent books, documents, papers, or other records” by Respondent (AF 2, Contract Clause H.6, EXAMINATION OF RECORDS (Clause B-14) (October 1987)).
5. Day-to-day operations of the CPU were “to be conducted according to the Domestic Mail Manual (DMM) to be provided by the Postal Service at the time of contract award”, and Appellant “was responsible for ensuring compliance by any CPU employees.” (AF 2, Contract Clause B.1, GENERAL REQUIREMENTS (CONTRACT POSTAL UNIT) (Clause 0B-592) (June 1988); Stip. 3). The Domestic Mail Manual required that money orders sold by the CPU “must be paid for in U.S. Currency or established traveler’s checks in U.S. dollars.” (DMM, Module S020, Money Orders, Section 1.3, incorporated by reference at 39 C.F.R. Part 111; Tr. 91-92, 94, 254).
6. Respondent provided stamps, envelopes, money order blanks, and certain equipment for use in the operation of the CPU (Stip. 2), and Appellant “assume[d] the risk and responsibility for its loss or damage” (AF 2, Contract Clause H.11, POSTAL SERVICE PROPERTY--SHORT FORM (Clause 2-12) (October 1987); Stip. 5[1]).
7. The contract also provided that, although the contractor was permitted to conduct nonpostal transactions, “[p]ostal funds must be kept separate from all other funds.” (AF 2, Contract Clause B.6, NONPOSTAL TRANSACTIONS (CONTRACT POSTAL UNIT) (Clause OB-596) (June 1988); Stip. 3).
8. Appellant was required to keep financial records of its postal transactions, using Postal Service Form 1412-A, Daily Financial Form (referred to by the parties and witnesses and hereafter as “1412"). A separate 1412 was filled out for each day the unit conducted business. (Tr. 33-34, 52, 311; AF 5, Exhibit 2). On each form 1412, Appellant’s clerk entered the beginning “Stamp Accountability” for the office plus the day’s money order transactions, receipt of meter fees and other fees, receipt of stamps from the managing post office, return of stock, sales of stamps, and the resulting closing balance of the stamp accountability (Tr. 52, 124, 305). The unit’s “Stamp Accountability” was the total of stamp stock that should have been on hand at the unit, and the stamp accountability on the 1412 is a running balance, reflecting all transactions from the beginning of the contract when the unit was first supplied with stamps (Tr. 108, 138-139, 166, 171, 205, 310).
9. In completing the 1412, the figure for daily sales of stamps (identified as “Postage Sales”) is a derived figure and does not result directly from a count of the stamps actually sold during the day. The unit subtracts its money order and postage meter sales and the amount of any cash retained from the previous day from the amount of cash on hand at the end of the day, and records the difference as “Postage Sales” (Tr. 281). This figure is subtracted from the beginning balance of the stamp accountability to show the closing accountability.[2] If money orders are issued without payment or stamps are taken without payment or cash is taken from the unit, the unit’s stamp accountability as shown on the 1412 will be higher than the amount of stamps actually on hand (Tr. 139, 169, 281-282).
10. Stamps were supplied by the Sacramento Post Office’s stamp distribution office (“SDO”) and were shipped by registered mail to Appellant, a signed receipt being obtained by the carrier for each delivery (Tr. 110, 112). Appellant’s clerk verified the amount of each shipment and entered the amount as “Stamps Received” on the 1412 (Tr. 219-220). While there might occasionally be errors in entering the amount of stock received in a shipment or a failure to enter a shipment, it would be very unlikely that a contract unit would make an entry on the 1412 showing “Stamps Received” if it had not received a shipment from Respondent (Tr. 194-195).
11. Each day, Appellant sent its 1412[3] and cash received for sales to the Sacramento Post Office (Tr. 117, 118; AF 5, Exhibit 2). The cash went to the bank and the 1412s went to the post office’s accounting section where they were reviewed for accuracy and reconciled with other records available to the accounting section, including bank records, money order records and daily records of stamps shipped to the CPU by the stamp distribution office (Tr. 106-109, 117, 132, 181, 317-318, 320).
12. Although there might be a few days’ lag before the CPU reported receipt of a stock shipment, the accounting section was always able to reconcile the records (Tr. 139, 144-145, 164, 166, 183, 305, 317). If the stamp distribution office’s record of daily stamp shipments showed a shipment of stamps to Appellant, and the unit’s 1412 did not show and account for receipt within a short time thereafter, or if the unit showed receipt of a different amount of stamps or showed receipt of a shipment that the stamp distribution office had no record of shipping, the accounting section would call the unit and straighten out the problem, tracing the shipment through registered mail records if the CPU said it was not received (Tr. 112-113, 127, 132, 145-146, 181, 184, 185-186, 317). Appellant’s 1412s were always reconciled within a short time after submission, so the figure shown on the 1412 for the unit’s accountability accurately reflected the amount of stamps and cash the unit should have had on hand (Tr. 135, 138, 139, 164, 166, 191, 317, 320).
13. A Postal Service computer-generated summary of stamp shipments to the CPU after February 2, 1995, through October 16, 1995, showed a total figure for stamps shipped to Appellant during the period that was about $21,500 less than the total figure shown as received by the unit on its 1412s during the same period (AX 1, 3A).[4] The summary showed 49 shipments with a total value of $146,430, while Appellant’s 1412s showed receipt of about 56 shipments[5] with a total value of $167,900. Comparing individual shipments shown on the summary (which was prepared in February 1997 from Respondent’s computer records) to the unit’s 1412 revealed only a rough correlation. Some of the shipments shown on the summary were reflected as received a few days later on the 1412[6], but in many instances the 1412 reflected receipt of stamps in amounts that did not correlate to the summary shipment records (AX 1, 3A). Some figures were different but roughly the same as the shipments[7], but the 1412s also showed receipt of many shipments that were not shown on the summary, and there were some shipments on the summary that were never reflected as received by the unit on its 1412 (AX 1, 3A). That summary, Appellant’s Exhibit 3A, however, was not the daily stamp shipment record used by the accounting section when contemporaneously reconciling Appellant’s daily 1412s (Tr. 120, 164, 319), and a notation at the end of the summary stated, “FORM 3309 SHIPMENTS, FORM 3329 TRANSFERS, AND BULK REQUISITIONS FROM SUPPLIERS DATA ARE NOT INCLUDED.”[8] (AX 3A).
14. The unit had been audited in October 1993, at which time a shortage of about $2,000 was discovered and was promptly repaid by Appellant (Tr. 47, 50, 228; Stip. 9). Postal Service practice is to verify the accountability of the CPU at least once every year (Tr. 49, 228; Postal Service F-1 Handbook, Post Office Accounting Procedures, Section 429.3), although the contract itself does not contain a requirement for Respondent to conduct annual audits (AF 1-4).
15. On October 26, 1995, as part of a routine audit of the Sacramento District (Tr. 204), auditors from the Postal Inspection Service made an unannounced visit to Appellant’s business to audit the stamps and operations of the CPU (Tr. 206, 226; Stip. 10). Appellant’s employee participated in the count of the stamp stock (Tr. 206, 232), which revealed a shortage of approximately $22,000. (AF 5, p. 1; Stip. 10).
16. On the next day, a Postal Service manager and Appellant’s employee recounted the stock (Tr. 31, 55, 59, 206, 235). The total accountability (cash and stock) of the unit, as shown on its most recent (October 25, 1995) daily 1412, was $32,453.14 (Tr. 292, 295-296, 305; AF 1B). However, the cash and stock on hand, as actually counted, was only $10,914.91, resulting in a shortage of $21,538.23 (Tr. 166, 298, 311). Appellant’s owner signed the PS Form 3294, Cash and Stamp Stock Count and Summary, on which the detailed results of the October 27 count were recorded, signifying his agreement with the count (Tr. 56, 62, 308; AF 5, Exhibit 1). The shortage was later reduced to $21,202.73 due to certain account adjustments that were pending at the time of the audit (Tr. 27, 65, 293; Stip. 10). The shortage equaled almost two-thirds of the total unit accountability (Tr. 32, 46, 222, 235, 237).
17. On October 30, 1995, at the direction of the contracting officer, the Sacramento Post Office’s Metro Station Manager, who was the contracting officer’s representative (AF 4, Contract Attachment 1, Paragraph I.1; Stip. 8), issued a demand to Appellant for immediate payment of $21,538.23[9] due to the unit shortage of October 27 (Tr. 27, 59; AF 6; Stip. 11). Postal operations at the unit were suspended at about that time, and Respondent removed its stamp stock from the store (Tr. 27, 29).
18. By letter dated November 9, 1995, the contracting officer demanded that Appellant repay the $21,202.73 shortage, and advised that if this was not done by November 20, 1995, the contract may be terminated (Respondent’s Exhibit (“RX”) 2).
19. The investigation of the past operations of the CPU continued, and the unit’s employees were interviewed. During this investigation, the following practices of the CPU were admitted by Appellant’s employees: (1) on numerous occasions the owner’s wife, who also worked in the contract unit, paid for money orders issued for her benefit or for the benefit of family members with her personal check (Tr. 213, 245-247, 257; AF 5, Exhibits 2, 4); (2) she occasionally used stamps and meter postage for herself or family without paying (Tr. 213, 241, 283; AF 5, Exhibits 2, 4); (3) she did not pay the money order fee when issuing money orders for her personal use (AF 5, Exhibit 4); (4) Appellant’s owner occasionally used cash from the postal unit to pay vendors making deliveries to the delicatessen, but he contended he replaced the cash as soon as the delicatessen had enough cash sales to do so (Tr. 214, 253; AF 5; AX 4; RX 3); (5) some months earlier, on at least one occasion, a then-employee issued a money order without obtaining (or making) full payment for it (Tr. 261; AF 5, Exhibits 2, 4; AX 4); and (6) during the October 26 audit, the owner’s wife slipped her check for $250 in the till for the purpose of paying for a money order she had obtained and other recent transactions she knew she had not paid for (Tr. 213, 239-240, 285; AF 5, Exhibit 2).
20. The investigators provided the results of the investigation in a report to the contracting officer sometime after January 18, 1996 (Tr. 28--29, 62, 90-91; AF 5). The contracting officer had discussed the matter with the station manager, and, after reviewing the Inspection Service report, she terminated the contract on one day’s written notice citing the audit shortage of $21,202.73 but also relying on the examples of financial mismanagement revealed in the investigation (Tr. 28, 90; AF 7). Appellant filed a timely appeal (AF 8; Stip. 20).
21. Appellant has never paid directly to Respondent any portion of the loss (Tr. 27-28; Stip. 11). However, as required by the contract (AF 3, Solicitation Provision J.2, CONTRACT POSTAL UNIT BOND (Provision OA-509) (June 1988); Contract Attachment 1, Paragraph I.8), Appellant had provided a bond for Respondent’s benefit which obligated the bonding company to pay Respondent unless Appellant fully performed its duties under the contract and accounted for all monies and stamps furnished by Respondent (RX 1; Stip. 7). Respondent demanded payment of the shortage from the bonding company (Tr. 67), and on or about May 9, 1996, the bonding company paid Respondent $21,202.73 (Tr. 28; AF 5, p.2; Stip. 12).
DECISION
Respondent argues that it has demonstrated that Appellant was responsible under the contract for repayment of a substantial shortage occurring in the accountability of its contract postal unit and that the shortage plus the many financial improprieties disclosed during the investigation of the shortage justified the decision to terminate the contract on one-day’s notice.
Appellant challenges the existence of a shortage in the first place. Appellant contends that it has shown that Appellant’s clerk who entered receipt of shipments of stamps into the unit’s financial records recorded receipt of more stock than the unit actually received and that the 1997 summary of shipments is an accurate record of stamps shipped to Appellant. It contends that its over reporting roughly equals the amount of the claimed loss and that if the stamp shipments had been properly reported in the unit’s records, the audit would not have shown a shortage. Furthermore, it contends that the financial transactions alleged by Respondent to have been improper were not sufficient to justify the termination on one-day’s notice because they were minor and few and did not result in any loss to Respondent. Additionally, Appellant contends that Respondent’s failure to perform an audit for more than two years and its failure to give Appellant notice and an opportunity to correct any practices Respondent disapproved of render the termination improper and excuse Appellant from repaying any shortage found to exist.
Was There a Shortage?
Appellant argues that Respondent’s own records show that it sent to the CPU less stock than the CPU reported as received. The shipments shown on the stamp shipment summary generated by Respondent in 1997 (Finding 13) total much less than the amount of stock listed as received on Appellant’s 1412s. However, Appellant has not shown that the summary is a complete statement of shipments of stock made to the CPU. The summary, Appellant’s Exhibit 3A, appears to be a computer record of stock shipments to Appellant’s CPU during the February through October 1995 period. It was prepared from Respondent’s computer records in February 1997, apparently in response to a discovery request, and is not the daily record of stock shipments that the accounting section used to reconcile the 1412s daily (Finding 13). There was no testimony from a witness familiar with the summary that it reflected all shipments to Appellant, and a notation at the end of the stamp shipment summary states that certain shipments of stock are not included (Finding 13). The record does not reflect what those exclusions were and whether they might be relevant to this decision, and therefore it is not possible to conclude that the historical summary shows all of the stock shipments to the unit. The summary was not a contemporaneous document used by the parties in conducting their dealings and was not shown to be a complete, reliable representation of all stamp shipments to Appellant.
Additionally, Respondent cross-checked Appellant’s 1412s daily and employed a painstaking process to correct any discrepancies noted on the 1412s as they were submitted (Finding 11, 12). Respondent’s witnesses testifying to the method for insuring the accuracy of the 1412s on a daily basis were credible and knowledgeable. Through that testimony, Respondent demonstrated that the process guaranteed that the accountability as shown on the 1412s was accurate (Finding 12). Therefore, although the variances between the historic summary and Appellant’s 1412s were not fully explained, Respondent has demonstrated that the 1412s were the most reliable reflection of the stamps received by the CPU and that the accountability as carried on Appellant’s 1412s was accurate. Finally, it is extremely unlikely that Appellant’s clerks would have repeatedly entered shipments of stock that Appellant’s CPU never received (Finding 10). Appellant presented no evidence that could possibly explain how this would occur.
Respondent has shown that at the time the CPU was audited in October 1995, the unit was $21,202.73 short (Findings 12, 16).
Responsibility for the Shortage
Under the contract, Appellant was responsible for Respondent’s property, including stamps and postage, entrusted to it for operation of the contract postal unit, and Appellant assumed the risk of its loss (Finding 6). That the loss may have been caused by Appellant’s employees does not exonerate Appellant, because Appellant was responsible for the actions of its employees (Finding 5). Thus, under the language of the contract, Appellant is responsible for the shortage. See Robert A. and Sandra B. Moura, PSBCA Nos. 3460, 3622, 96-1 BCA ¶ 27,956; John W. Bradbary, PSBCA No. 3126, 93-2 BCA ¶ 25,563.
Appellant argues that Respondent’s failure to follow its practice to audit the CPU each year (Finding 14) excuses Appellant from liability. An audit every year is not a contract requirement (Finding 14), and therefore Respondent’s failure to audit before October 26, 1995, is not a breach of the contract that excuses Appellant’s performance deficiencies and shortage. See Lee Shumate, PSBCA No. 3647, 97-2 BCA ¶ 29,117; Robert A. and Sandra B. Moura, PSBCA Nos. 3460, 3622, 96-1 BCA ¶ 27,956.
Was the Termination Proper?
The termination of Appellant’s contract postal unit contract under the contract’s one-day notice provision was justified. In determining whether to terminate the contract, the contracting officer had before her reliable information that the unit had suffered a significant shortage -- about two-thirds of the stock that should have been on hand was missing (Finding 16). She knew that Appellant’s employees had repeatedly violated the procedures in place to protect Respondent’s stock and cash from depredation (Finding 19) and that at least one of Appellant’s employees, who was also the owner’s wife, regularly used the unit’s stamps and money orders for her family’s benefit without full, prompt repayment. She knew that Appellant had used the unit’s cash to pay vendors of its nonpostal business (Finding 19). Appellant’s clerks told the investigators that they had always replaced any money or stamps taken, but the repeated misappropriations plus the large shortage were sufficient reasons for terminating the contract on one-day’s notice to protect the interest of Respondent. See Carlos D. Delbrey, PSBCA No. 3892, 97-2 BCA ¶ 29,239; Robert A. and Sandra B. Moura, PSBCA Nos. 3460, 3622, 96-1 BCA ¶ 27,956.
Appellant argues that the termination was improper because under the inspection clause of the contract (Finding 4), the contracting officer was required to give the contractor written notice of any performance deficiencies and an opportunity to cure same before terminating the contract based on those deficiencies. However, one-day termination, without prior warning, is a reasonable and proper response to immediately rectify a situation where, as here, Appellant was found to be in default as a result of a significant cash shortage and serious financial misconduct by Appellant’s employees. See Carlos D. Delbrey, PSBCA No. 3892, 97-2 BCA ¶ 29,239.
Furthermore, Appellant has not demonstrated that it was prejudiced by Respondent’s failure to give Appellant notice of the performance deficiencies. Appellant’s owner was aware of and directed the use of the unit’s cash to pay his nonpostal vendors, a clear violation of the contract requirements. Appellant presented no evidence that the owner was unaware of the remaining obvious violations, most of which were committed by his wife, or that he did not know that her actions were contract violations. Therefore, there has been no showing that termination on one-day’s notice without advance notice of the deficiencies prejudiced Appellant, and the lack of notice is not a basis for overturning the termination. See Fantastique’ Ultimatique’ Nautique’, PSBCA No. 3652, 96-1 BCA ¶ 28,150. Accordingly, termination on one-day’s notice was not an abuse of the contracting officer’s discretion or a violation of Appellant’s rights under the contract. See Lee Shumate, PSBCA No. 3647, 97-2 BCA ¶ 29,117.
CONCLUSION
Respondent has shown that a $21,202.73 shortage occurred in the accountability that Appellant was responsible for, that Appellant was liable under the contract for repayment of the shortage and that Respondent’s termination of the contract on one-day’s notice was justified. Accordingly, the appeal is denied.
Norman D. Menegat
Administrative Judge
Board Member
I concur:
James A. Cohen
Administrative Judge
Chairman
I concur:
David I. Brochstein
Administrative Judge
Vice Chairman
[1] The Stipulation contains two paragraphs numbered 5. This reference is to the second paragraph 5, and the reference in Finding 4, above, is to the first.
[2] The closing accountability balance is also increased by stamp shipments received and decreased by stamps returned to the Sacramento Post Office.
[3] The unit also retained a copy of each 1412 (Tr. 320).
[4] Records for earlier periods of the contract were not available at the hearing and are not in the record. Likewise, the earliest 1412 in the record is that for February 2, 1995. (AX 1, 3). Appellant suggested but did not show that the absence of earlier records was the result of Respondent’s failure to preserve records Appellant had requested in discovery.
[5] Receipt of more than one shipment was reported on some 1412s.
[6] For example, the summary shows a shipment of $7,091 on April 24, 1995, and $8,972 on August 2, and the unit 1412 for April 25 shows receipt of $7,091 in stamps and that for August 3 shows receipt of $8,972 in stamps (AX 1, 3A).
[7] The summary shows a stamp shipment on June 16 of $6,846, and Appellant’s 1412 shows receipt of stamps on June 20 of $7,396. A shipment of $5,939 was shown on July 7, and Appellant’s 1412 showed receipt of stamps on July 10 of $6,039. (AX 1, 3A).
[8] The meaning of the notation is not explained in the record.
[9] There is no explanation why this demand did not reflect the adjustments made to the calculation of the shortage.