Appeal of

RONALD K. STANLEY
VILLAGE EAST DRUGS

Under Contract No. 036365-85-P-1180
PSBCA No. 4156

APPEARANCE FOR APPELLANT:
Charles W. Simmons, Esq.

APPEARANCE FOR RESPONDENT:
Robert E. O’Connell, Esq.

OPINION OF THE BOARD

            Appellant, Ronald K. Stanley/Village East Drugs, filed a timely appeal from a contracting officer’s decision asserting a claim against Appellant in the amount of $262,209.67 due to a money order shortage at the contract postal unit operated by Appellant under its contract with Respondent, the United States Postal Service.  A hearing was held in Las Vegas, Nevada.  Both entitlement and quantum are at issue.

FINDINGS OF FACT

            1.  On July 26, 1976, Appellant entered into a contract with Respondent to operate a contract station providing specified postal services at Appellant’s business, Village East Drugs, in Las Vegas, Nevada (Joint Stipulation (Stip.) 1; Appeal File Tab (AF) 1).

           2.  On September 22, 1980, Appellant and Respondent entered into a successor contract for the operation of Contract Station (CPU) No. 7 at the same location.  The contract was for an indefinite term, at an annual rate of $1,200^[1].  Under the contract Appellant agreed to provide various postal services, including the sale of stamps and money orders.  (Stip. 2, AF 5).

           3.  The contract Specification Requirements (PS Form 7311, Dec. 1979) contained two provisions pertinent to this dispute:

            “18.  The contractor shall be personally responsible, accountable, and answerable for the faithful performance and discharge of all the duties and obligations assumed by him in this contract, whether or not he personally conducts the Contract Unit.  The contractor shall be chargeable with all acts and omissions of his employees who assist in the conduct of the Contract Unit.

            19.  All monies received from the operation of the Contract Unit are the property of the U.S. Postal Service and not the property of the contractor.  Such monies shall not be commingled with personal or other funds of the contractor, and shall not be used for any purpose other than in connection with the postal duties and functions of the Contract Unit.  The contractor shall account for such monies at the close of each day’s business.”  (Stip. 3, 5; AF 5).

           4.  Paragraph 7, INSPECTION OF CONTRACT WORK, (PS Form 7369, Dec. 1979), of the contract’s General Provisions provided that:

            “7.  The COR shall periodically review the Contractor’s performance to assure the Contractor is performing in accordance with postal rules and regulations.  The COR will immediately bring to the attention of the Contractor all unsatisfactory service.  If the Contractor continues to perform unsatisfactorily, the Contracting Officer will formally notify the Contractor in writing of the deficiencies and that the continued unsatisfactory performance may be cause for termination of the contract.”  (Stip. 4; AF 5).

           5.  Handbook F-1 (April 1991), “Post Office Accounting Procedures,” contains internal procedural guidelines regarding financial responsibilities of postmasters and other installation heads that have financial accountability (Handbook §111).  The Handbook was not incorporated into Appellant’s contract  (AF 5).

           6.  Respondent conducted periodic audits of CPU No. 7.  From 1976 through 1996 (with the exception of calendar years 1991, 1992 and 1994), the CPU was audited by Respondent at least annually.  (Stip. 9; AF 7, 9, 10, 11, 16, 19, 21, 23, 24, 26, 28, 31, 32, 38, 62-65). These audits were conducted in accordance with internal Postal Service guidelines to determine whether the actual accountability and balances of the CPU on the day of the audit matched the Postal Service’s record of what the accountability should have been on that date.  Unsold money orders were not part of the accountability that was verified during these audits.  However, the auditor did verify that the serial number of the first money order being sold on the day of the audit was the next number in sequence from the last money order sold on the previous day.  (Transcript pages (Tr.) I-50-54, 62, 63, 72-76, 84-88, 103, 107, 108).

           7.  The Las Vegas Stamp Distribution Office provided blank money orders to Appellant’s CPU in serial-numbered blocks of 100.  In turn, the Stamp Distribution Office reported the issuance of each block of 100 money orders to the Las Vegas Postal Service Accounting Unit.  (Tr. II-137-139).

           8.  Appellant’s CPU submitted daily reports of all postal transactions, including money order sales.  The Las Vegas Postal Service Accounting Unit reviewed these reports.  The Accounting Unit compared the CPU’s reported sale of money orders to the Stamp Distribution Office’s report of money orders distributed to that CPU.  The primary comparison involved checking whether the CPU sold money orders in numerical sequence within a block of 100 money orders.  However, there is no requirement that a CPU sell money orders in numerical sequence from one block of money orders to the next block.  (Tr. I-119-121, I-126-129, II-60-62).

           9.  A Federal Reserve Bank redeems Postal Service money orders purchased by customers, when they are cashed.  The Federal Reserve Bank, in turn, charges the redeemed values of the money order against a U.S. Postal Service account maintained by the U.S. Department of Treasury.  A report of activity in this account is provided to the U.S. Postal Service for reconciliation of the money orders received by the Federal Reserve banks against the Postal Service’s records of money orders sold.  (Tr. Vol. I-13-16).

           10.  This reconciliation process identifies Postal Service money orders that are cashed throughout the Federal Reserve system, and charged against the Postal Service account, but lack a record within the Postal Service system of having been sold.  However, the process takes up to a year to detect money orders that are cashed but not reported as having been sold.  In addition, another three months can pass before a local post office or area is notified of a lack of reconciliation of money orders sold from its location and the failure to report those money orders as having been sold.  (Tr. Vol. I-16-19).

           11.  A quarterly report called an “04” report is generated at Respondent’s St. Louis Postal Data Center for the finance office of each Postal Service district.  This report shows money orders which were issued from post offices within the district that have not been reported as sold by that particular post office.  (Tr. I-23, I-25; AF 56).

           12.  An 04 report issued in January of 1997 indicated a substantial number of money orders had been sold as far back as 1995 from Appellant’s CPU but not reported by the CPU as having been sold (Tr. I-130, I-131).  Based on this information, the Postal Inspection Service began an investigation on January 28, 1997 (Tr. I-170, I-171; AF 58).

           13.  In the initial phase of the investigation, the Postal Inspector obtained copies of several hundred of the unreconciled money orders sold at CPU No. 7.  From these copies, Postal Inspectors identified a specific employee at CPU No. 7 who had both issued and was the payee on some of the unreconciled money orders. (Tr. 169-177).  Thereafter, between April 4 and April 8, 1997, Postal Inspectors made undercover purchases of money orders from this employee at the CPU.  When it became apparent that the employee was not reporting the sale of the undercover money order purchases, Postal Inspectors interviewed the employee on April 9, 1997, at which time he acknowledged that he had been selling money orders without reporting their sale.  Overall, the investigation determined that, beginning on August 21, 1995, the employee had sold without reporting the sale of 700 money orders, for a total value of $262,209.67  (Stip. 11; AF 58).

           14.  As a result of the unreported money order sales, the Postal Service experienced a loss of $262,209.67 (AF 58).

           15.  Appellant failed to ensure that the CPU employees properly accounted for all blank money orders issued to it (Tr. I-188-190, 204, 205).

           16.  At the conclusion of the Postal Inspection Service investigation, Respondent issued a letter of demand to Appellant to repay the $262,209.67 loss resulting from the misappropriation of money orders by Appellant’s employee.  When Appellant failed to pay that amount, on December 12, 1997, the contracting officer issued a final decision asserting a claim against Appellant in the amount of $262,209.67, and Appellant timely appealed that decision.  (Stip. 14, 15; AF 43, 46, 47).

DECISION

           Respondent argues that Appellant is strictly liable under the terms of the contract for losses caused by the acts of its employees.  Respondent further argues that it properly performed audits of Appellant’s CPU and did not contribute to the loss suffered by Appellant by failing to act sooner to prevent the continuing thefts by Appellant’s employee.  Appellant argues that the contract does not impose strict liability on Appellant for losses caused by the acts of its employees and that Respondent is estopped to recover the money order losses because of Respondent’s failure to detect and take action to prevent the theft from occurring.  We find no merit to Appellant’s arguments.

           Under the contract, Appellant was strictly liable to Respondent for any loss suffered by the Postal Service that was caused by misappropriation of the Postal Service money orders entrusted to Appellant.  See Elizabeth Akoubian, PSBCA No. 3813, 97-2 BCA ¶ 29,110; 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; Clines Office Products, PSBCA No. 3045, 92-1 BCA ¶ 24,725.  Appellant failed to provide any legal support or evidence for its argument to the contrary.

           We find no merit to Appellant’s argument that Respondent should be estopped from asserting strict liability for the loss against Appellant.  To invoke the doctrine of estoppel, Appellant must first show, among other elements, that Respondent was actually aware of the misappropriation of money orders but did nothing to prevent it.  See F & B Realty, PSBCA No. 2529, 91-2 BCA ¶ 23,788.  The evidence demonstrates otherwise.  There is no evidence in the record that Respondent became aware of money orders sold by Appellant’s CPU, but not reported as sold, prior to January of 1997^[2].  Almost immediately after Respondent became aware of the unreported money orders, the Postal Inspection Service began an investigation of Appellant’s CPU and its money order transactions (Finding of Fact No. (FOF) 12).  The investigation was concluded on April 9, 1997, a little over two months from when it began (FOF 13).  This period of time to conduct an investigation concerning the possible embezzlement of over a quarter of a million dollars was not unreasonable.  See Carlos D. Delbrey, PSBCA No. 3892, 97-2 BCA ¶ 29,239.

           The evidence, likewise, does not support Appellant’s argument that Respondent failed to properly perform audits of Appellant’s CPU.  Appellant relies on Handbook F-1 for support concerning the timing and manner of conducting audits of the CPU, i.e., that the audits should have been conducted annually^[3].  However, Respondent periodically conducted many audits of Appellant’s CPU.  With the exception of three calendar years since the CPU contract was awarded, all of which were prior to the time of the unreported money orders at issue herein, the audits were conducted at least annually, and in accordance with Postal Service guidelines.  (FOF 6).

           The primary reason that Appellant’s employee was able to continue to sell money orders and “pocket” the proceeds was because Appellant failed to establish and implement procedures to ensure that its employees properly reported and accounted for the sale of all blank money orders issued to them (FOF 15).  Appellant hired and supervised the employee responsible for the money order thefts and, under the contract was responsible for his conduct (FOF 3).  It was Appellant who continued to issue blank money orders to the guilty employee without requiring him to fully account for the money orders previously issued to him.  Appellant could have imposed more stringent money order accounting requirements to protect itself from such losses.  See Jaehee Yoshimoto, PSBCA Nos. 2315, 2749, 92-1 BCA ¶ 24,504.  Because it failed to do so, Appellant is responsible for the loss that occurred.

           Accordingly, Appellant is liable to repay to the Postal Service the sum of $262,209.67, and this appeal is denied.

William K. Mahn
Administrative Judge
Board Member

I concur
James A. Cohen
Administrative Judge
Chairman

I concur
David I. Brochstein
Administrative Judge
Vice Chairman

[1]   In 1986, the annual rate was increased to $30,000 (Stip. 7).

[2] We need not decide, as argued by Appellant, whether Respondent’s employees should have become aware of the CPU’s money order discrepancies earlier, because estoppel also requires an element of reliance and Appellant offered no evidence that he was relying on the Las Vegas Accounting Unit to detect this type of theft.  See F & B Realty, supra.

[3]  Contrary to Appellant’s assertion, Handbook F-1 was not part of Appellant’s contract (FOF 5).