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

 04/05/90

 Grant, Quentin E., Chief Administrative Law Judge

 APPEARANCES FOR RESPONDENTS:  Barnet D. Skolnik, Esq., Dennis  
 P. McGlone, Esq., Whiteford, Taylor & Preston, 7 St. Paul Street,  
 Baltimore, MD  21202-1629  

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

On August 1, 1989, Complainant filed a complaint alleging that Respondents are engaged in a scheme or device to obtain money through the mail by means of false representations in violation of 39 U.S.C. § 3005. Specifically, the complaint alleges that Respondents seek remittances of money or property through the mail by means of deadline notices which demand payment of an amount due a third party, referred to Respondent National Financial Services (NFS) for collection. Paragraph 4 of the complaint alleges that Respondents falsely represent in the deadline notice that:

"a. The amount listed in the notice is owed by the addressee to the "Contest Newsletter" and has been referred to Respondents for collection.

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

Respondents' answer to the complaint admits the use of the deadline notice attached to the complaint, admits that the amount stated in the notice has been referred to NFS for collection and alleges Respondents' belief that such amount is owed by the addressee to "Contest Newsletter" and that the recipient of the notice has subscribed to "Contest Newsletter." They deny that the representations alleged in the complaint are false.

A hearing on the merits was held in Baltimore, MD, on November 3, 1989. At the hearing the complaint was amended to add as a respondent NFS, Incorporated, the actual corporate name of National Financial Services. Complainant's sole witness was Postal Inspector Robin O. Shipman. Respondent Robert Smith and Richard Younger, a financial examiner from the Maryland Department of Licensing and Regulations, testified for Respondents.

The parties have filed proposed findings of fact and conclusions of law all of which have been considered. They have been adopted to the extent indicated below and have otherwise been rejected as irrelevant or contrary to the evidence. The following findings of fact are based on a review of the entire record herein and my observation of the witnesses and their demeanor.

A. The Parties

1. Respondent, NFS, Incorporated (NFS) is a corporation organized and incorporated under the laws of the State of Maryland and is engaged, among other things, in the business of debt collection (Tr., pp. 132-33).

2. Respondent Robert J. Smith is the director and sole stockholder of Respondent NFS (Tr., p. 132).

3. Respondent Beverly A. Smith is the president of NFS, but holds no stock in the corporation (Tr., pp. 132-33).

4. NFS has been in the collection business for approximately twenty-five years (Tr., p. 132).

5. The debt collection activities at issue in this litigation were engaged in by the corporate entity, NFS (Tr., p. 48).

B. The Contract with Contest Newsletter

6. Contest Newsletter had a number of subscribers who had not paid their subscription fees. The owner of Contest Newsletter, Park Avenue Publishing, contractually placed these accounts with NFS for collection (Tr., p. 133).

7. NFS's contractual negotiations and other contacts with Contest Newsletter were conducted by an NFS sales representative in New York, Robert Fibkins (Tr., pp. 136-138, 146, 176).

8. Computer tapes listing Contest Newsletter delinquent subscribers were forwarded to NFS, approximately monthly, by a corporation known as CDS, Inc., (CDS) a data processing firm located in Des Moines, Iowa, which handled subscriptions to the publication (Tr., p. 56-7, 147).

9. The data on the computer tapes included, for each account, a name, address, amount owed and an account number. The tapes were loaded by NFS on its own computer mainframe, which then generated collection notices (Tr., p. 148).

10. Prior to collection, neither NFS or any other entity in the collection industry confirms the accuracy or legitimacy of the names, addresses, and debts which are listed on such computer tapes (Tr., pp. 149-50).

11. The governing statute, the Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., requires such confirmation by a collection agency only if the debt is disputed by the debtor. 15 U.S.C. § 1692g (b). The reverse side of the collection notice mailed by NFS advised the recipient that NFS would verify the debt within 30 days if the recipient disputed the debt or any part of it (CX-2). This advice conforms to the requirements of the statute.

C. The Collection Work

12. In December of 1988, NFS began collections of overdue subscription fee accounts for Contest Newsletter (Tr., pp. 133-34).

13. In December 1988 NFS received 18,599 accounts for collection, 31,049 in February 1989, 5,469 in March and 47,349 on April 19, 1989. NFS mailed collection notices on April 21 for the accounts received on April 19 (Tr. pp. 134-35).

D. The Receipt of Complaints

14. Shortly after the mailing of April 21, 1989, Respondent Beverly Smith, who handled all incoming complaints, noticed that an abnormally large number of complaints were being received following the April 21, 1989 mailing, more than was her usual experience with mailings of this type. She advised Respondent Robert Smith that there was an apparent problem, that there had to be something wrong (Tr., pp. 135-36).

15. Upon being advised that a problem existed with the April 21, 1989 mailing, Robert Smith had his staff in Baltimore contact NFS's New York salesman, Robert Fibkins, to ask him to make inquiries at Contest Newsletter as to whether NFS had been given wrong names on the computer tape received on April 19, 1989 (Tr., pp. 136-37).

16. After checking with Contest Newsletter, Mr. Fibkins reported back to NFS that there was nothing wrong with the tape (i.e., all of the persons listed on the tape had in fact subscribed to Contest Newsletter, and all of their accounts were in fact delinquent) (Tr., pp. 138-39).

17. As to the four tapes received prior to April 19, 1989, no further mailings were made to any of the names on those tapes after May 10, 1989, whether they had complained or not (Tr., pp. 142-45).

18. Mailings were made on tapes received in May and June, but no follow-up mailings were made on these or any other tapes after June 21, 1989 (Tr., pp. 161-64).

19. On May 30, 1989, Postal Inspectors Robin Shipman and Aileen Norrell visited the offices of NFS and spoke with Beverly Smith about complaints received concerning dunning notices mailed by NFS on Contest Newsletter accounts (Tr., pp. 103-04).

20. NFS suspended collection efforts on the earliest four tapes because of the complaints generated by the April 21, 1989 mailings and then suspended all collection efforts for Contest Newsletter because of legal problems generated by such efforts and as a matter of sound business practice during the pendency of the Postal Service and State of Maryland investigations (Tr., pp. 145, 166-67).

E. The "Ticket 6" Coupons

21. "Ticket 6" is a coupon included in the solicitation mailed by Contest Newsletter and then returned by some of the addressees to Contest Newsletter. Several Tickets 6 were received in evidence as CX-3.

22. Ticket 6, when returned by an addressee, advises Contest Newsletter that the addressee wishes to obtain a free issue of Contest Newsletter and to subscribe to 7 additional issues of the magazine on a conditional basis (CX-3).

23. If the addressee is satisfied with the free issue, the addressee is to remit $7.95 for the 7 additional issues. The addressee may, however, cancel the subscription by writing "CANCEL" on the $7.95 invoice and returning it to Contest Newsletter (CX-3).

24. The return of Ticket 6 constitutes a subscription to Contest Newsletter, with the addressee reserving the right to cancel the subscription if not satisfied with the product (CX-3).

25. Respondents had no knowledge of, or participation in the creation of, the solicitation materials used by Contest Newsletter, and no knowledge regarding what the addressees had actually received from Contest Newsletter (Tr., pp. 159-60).

F. The Investigation and Verification of Subscriptions by

26. In or about May 1989, Postal Inspector Robin Shipman investigated several complaints that had been received by USPS regarding collection efforts made by NFS for Contest Newsletter (Tr., pp. 51-52).

27. By telephone, Mr. Shipman contacted CDS, the producers of the Contest Newsletter computer tapes received by NFS. Inspector Shipman sought to verify whether a certain group of twenty addressees, selected at random by him, had in fact subscribed to Contest Newsletter by returning Ticket 6 (Tr., pp. 76, 101).

28. Vera Howell, Senior Account Manager of CDS, reported that nineteen of the twenty addressees had returned Ticket 6 to Contest Newsletter (Tr., p. 76). Ms. Howell confirmed her finding in a letter with attached Tickets 6 (CX-3).

29. As to the last of the twenty addressees, Ms. Howell was unable to locate the specific Ticket 6, but there is no affirmative evidence that the addressee had not in fact mailed Ticket 6 to Contest Newsletter (Tr., p. 98).

30. Mr. Richard Younger, a Financial Examiner with the Maryland Department of Licensing and Regulation (MDLR), also investigated complaints regarding NFS collection efforts for Contest Newsletter accounts (Tr., p. 119).

31. On May 11, 1989, Examiner Younger forwarded to CDS a list of eleven addressees and requested a response as to whether these individuals had in fact subscribed to the publication (Tr., pp. 120-21).

32. Ms. Howell of CDS verified, in a letter dated May 31, 1989, to Examiner Younger (RX-2), that all eleven addressees on his list had in fact ordered Contest Newsletter by returning Ticket 6 (Tr., pp. 122, 127).

33. As to the remaining complaints in the files of Messrs. Shipman and Younger, there is no evidence that the complainants had not also in fact subscribed to Contest Newsletter by returning Ticket 6.

34. Inspector Shipman's file (CX-2) contained 157 complaints from all sources, including those from Mr. Younger's files (Tr., p. 54).

35. The ratio of complaints (157) to the total number of addressees contacted by NFS for overdue accounts for Contest Newsletter (223,000) is less than one-tenth of one percent (Tr., p. 182).

As stated earlier, the Complaint (paragraphs 3 and 4) asserts that the false representations alleged are found in Respondents' deadline notices which demand immediate payment of a bill owed to Contest Newsletter. As found above, random checks by the Postal Inspection Service and the Maryland Department of Licensing and Regulations of complaints made to them by recipients of these notices showed that 30 of 31 complainants checked had subscribed to the Contest Newsletter by returning Ticket 6 and, therefore, became obligated to pay the subscription price. There is no persuasive evidence that the remaining complainants had not also subscribed. Therefore, the evidence in the record relevant to the case against Respondents as alleged in the complaint does not sustain Complainant's case.

At the hearing, over Respondents' strenuous objection, Complainant sought, in effect, to expand the complaint to allege, and to prove, that the false representations charged should be found not just in Respondents' deadline notices but in such notices taken together with the Contest Newsletter solicitations mailed by Park Avenue Publishing (PAP), its publisher, which is not a party to this proceeding. n1 Complainant seeks to justify the expansion and his offer of evidence relevant thereto on the basis that Respondents' deadline notices continued misrepresentations perceived by complainant in the PAP solicitation and that Respondents here are agents of, or joint principals in a joint venture with, PAP in continuing these misrepresentations.

n1 Complainant proceeded against Park Avenue Publishing in a separate proceeding (P.S. Docket No. 35/42) which has been resolved by a consent order effective December 8, 1989.

Respondents' objection is technically correct. They did not, however, argue or show prejudice in presenting a defense to Complainant's case as expanded. In the absence of prejudice, in order to avoid multiple litigation, and to give consumers the benefit of consideration of all of Complainant's arguments, Respondent's objection is overruled.

The evidence is that Respondents had nothing to do with the Contest Newsletter solicitation by way of creation, dissemination, or knowledge of its contents. Their only relationship with PAP was a contractual one to collect overdue bills for subscriptions to the publication. Complainant has failed completely to prove that Respondents were the agent of PAP in making or continuing any misrepresentations which might be found in the solicitation. It has also failed to establish a basis for finding a joint venture between Respondents and PAP in making misrepresentations. It offers no legal support for its argument that Respondents' sharing a large percentage of its collections with PAP creates a joint venture or agency with respect to misrepresentations which might be found in the PAP solicitations.

Complainant argues that Respondents must be presumed to know the basis for their collection efforts prior to notifying consumers because of their obligation under the Fair Debt Collection Practices Act, (15 U.S.C. § 1692(g)(a)(4)) to obtain verification of the debt in the event it is disputed by a consumer. This argument is without merit. The statute does not impose a duty on a debt collector to ascertain facts bearing on the validity of the debt prior to sending a collection notice. It is only where a consumer, after receiving such a notice, disputes the debt that a debt collector is obligated to obtain such information and transmit it to the consumer. Respondents' notices, in compliance with the statute, advised addressees of their right to request verification of the debt in the event they wished to dispute it. Complainant says that this advice was not as prominent as it should have been in Respondents' notices. The statute, however, sets no type-size or location requirements for this advice.

If there were misrepresentations in PAP's solicitations which may have misled some subscribers, they have not been proved by Complainant. Had they been proved, there is no basis on the facts in this record, or in law, for holding respondents liable therefor. An agent is liable for a misrepresentation of his principal only if the agent "knows or should know" of it. n2 Respondents did not have actual knowledge of any misrepresentation in the PAP solicitation and Complainant has not established a basis for finding that they had constructive knowledge.

n2 Restatement (Second) of Agency, § 348, Comment:

b. Innocent agent of guilty principal. "An agent is not liable because of misrepresentations of the principal or of another agent unless he knows or should know of them. He is not affected by the knowledge of facts which the principal or another agent has had which, if known to him, would cause his representations to be fraudulent. An agent who makes untrue statements based upon the information given to him by the principal is not liable because of the fact that the principal knew the information to be untrue. An agent can properly rely upon statements of the principal to the same extent as upon statements from any other reputable source."

When an unusually large number of complaints were received following the April 21, 1989, mailing, Respondents promptly checked to see if anything was wrong with the tape (mailing list) and, learning that there was nothing wrong, were justified in concluding that the persons listed in the tape had in fact subscribed to Contest Newsletter. Complainant has not proved that possible misrepresentations in the PAP solicitation became known to Respondents in connection with that mailing or in any other way.

The solicitation mailed by PAP for subscriptions to Contest Newsletter did not direct the mailing of remittances to Respondents. Therefore, contrary to another of complainant's arguments, the provision in 39 U.S.C. § 3005(b) for ascertaining the existence of agency has no application in this case.

Complainant cites the Postal Service Decision in National Gold Mint, et al., P.S. Docket No. 22/165 (May 1, 1987) as precedent for holding Respondents, as receivers of remittances in response to debt collection notices, accountable for representations made in PAP's solicitations. In that case, it was held that individuals not responsible for the false advertising itself but playing some significant role in the scheme, such as receiving remittances for the product, were properly included in a cease and desist order. Respondents here were a debt collector. They did not receive remittances for subscriptions to Contest Newsletter and did not fulfill subscriptions. Therefore, the citation is inapposite.

1. The debt collection notices mailed by Respondents make the representations alleged in paragraph 4 of the Complaint.

2. Complainant has failed to prove the falsity of those representations.

3. Complainant has failed to prove liability of Respondents on the basis of agency, joint venture, or any other rationale for misrepresentations which may have been made in the solicitations of Park Avenue Publishing for subscriptions to Contest Newsletter.

4. Complainant has failed to establish any valid rationale for its proposed conclusion that Respondents' collection notice and the solicitations of Park Avenue Publishing for subscriptions to Contest Newsletter should be considered as a whole.

5. The complaint is dismissed.