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QC Communications Inc. v. Quartarone

Court of Chancery of Delaware

August 15, 2014

QC COMMUNICATIONS INC., Plaintiff,
v.
ANTHONY J. QUARTARONE and Q MEDIA, INC., Defendants.

Date Submitted: June 4, 2014

Barry M. Klayman, of COZEN O'CONNOR, Wilmington, Delaware; OF COUNSEL: Bernard Chanin, Philadelphia, Pennsylvania, Attorneys for the Plaintiff.

Perry F. Goldlust, of PERRY F. GOLDLUST, P.A., New Castle, Delaware, Attorney for the Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

The Defendant in this matter was a corporate officer and director of the Plaintiff corporation, which owns the radio station at which the Defendant was also employed. The Defendant set up his own corporation on the side. According to the Plaintiff, the Defendant officer sold assets belonging to the Plaintiff, and used his position as a corporate fiduciary to hide the fact that he diverted the proceeds thereof to himself via his own corporation. The Defendant officer maintains strenuously that this is untrue, and testified that he sold only consulting services unrelated to his duties to the Plaintiff through his own corporation. The record evidence convinces me that the Defendant's testimony is untrue, and that he did enrich himself through breaches of fiduciary duty. The Defendant, therefore, must account for those sums wrongfully diverted.

I. BACKGROUND

A. QC Communications

Defendant Anthony "Tony" Quartarone has over thirty years of experience in the radio industry.[1] Many years ago, Quartarone befriended now-retired lawyer Alvin Chanin, who—according to Alvin's son, Steven[2]—"developed an interest in radio broadcasting" through Quartarone.[3] In the late 1980s, Quartarone and Alvin formed a small group of investors to purchase a radio station in Ocean View, Delaware, which Quartarone managed until September 1997.[4]

In 1996, Plaintiff QC Communications Inc. ("QC, " or "the Company"), a Delaware corporation, was formed to effectuate the purchase of additional radio stations.[5] In 1997, QC purchased two radio stations located in Salem, New Jersey—WJKS-FM ("WJKS") and WFAI-AM;[6] only WJKS is pertinent to the matter before me. The Ocean View station was then sold, and WJKS was relocated to Wilmington, Delaware.[7]

Following QC's incorporation, Alvin became President and Secretary, while Quartarone became Vice President and Treasurer.[8] A five-person board of directors initially governed the corporation, with Quartarone, Alvin, Alvin's wife Myra, their son Steven, and Donald Snyder serving as directors.[9] Over the years, the composition of the board changed slightly, as did the officer positions. As of early October 2012, the Company's officers and directors were Quartarone, Alvin, Myra, and Steven.[10] Through a consent action executed October 4, 2012, Quartarone was removed from his positions as officer and director; his employment was also terminated at this time.[11]

Until October 2012, Quartarone held several employment positions at the station, including General Manager.[12] Although Alvin and Myra spent time at the station each week, Steven—who resides in California and only visited the station once before September 2012[13]—testified that Quartarone was often "the only person of the group regularly physically present at the station."[14]

Steven owns approximately 66 percent of QC's outstanding stock, while Quartarone retains approximately 32 percent.[15]

B. Kelvyn Ventour

Kelvyn Ventour, an independent record promoter, worked with Quartarone earlier in his career, prior to QC's purchase of WJKS, as well as during Quartarone's tenure at that station.[16] At deposition, Ventour testified that he often transacted with QC, through his company Kelvyn Ventour Promotions, Inc. ("KVP"), to purchase advertisements, "time buys, " that promoted music he was representing.[17] Quartarone facilitated most of these transactions on behalf of WJKS.[18]

C. Q Media

In April 2003, Quartarone founded Defendant Q Media Inc. ("Q Media"), a Delaware corporation for which he acts as the sole director and officer, and one of two stockholders.[19] According to Quartarone, this company was established so that he could charge for the consulting services he provided to record companies.[20]Apart from his work for QC, Quartarone testified that he would be hired by entertainers or promoters to listen to a song or record in order to comment on "which format [he] thought the record would work on, " and would then be compensated—as Q Media—for his advice.[21] Quartarone considers the proceeds of this alleged side business to be his separate property, and not that of QC.

Although Q Media predominately conducted this alleged consulting business with Ventour, according to Quartarone, he did not provide consulting for Ventour.[22] Rather, per Quartarone's testimony, Ventour acted as an intermediary between Quartarone and the artists or record companies.[23] In other words, instead of coming to him directly, "[r]ecord companies would go to Kelvyn; ask Tony what does he think of this record. I would give the advice, and then they would go back to them."[24] Ventour, however, denies that he played such an intermediary role or that he himself purchased consulting services from Quartarone or Q Media.[25]

Despite this purported consulting arrangement, Quartarone initially labeled the invoices from Q Media as charging for "adds." In the radio industry, an add "means that the record is going to be added to the station's playlist, "[26] and, if the station is a reporting station, like WJKS, then this "add" is reported to and tracked by services such as Mediabase and Broadcast Data Systems ("BDS") as songs these stations "are going to or have already started to support by airplay."[27]According to Joshua Medlock, the Director of Affiliate Relations and Integrated Music Marketing for Mediabase, "[t]he 'adds' are important to persons in the recording and broadcasting industry because they reflect which new songs are receiving airplay."[28] Although Quartarone insists that he was providing consulting and not selling "adds" (the proceeds from which would have belonged to QC), he did not have a credible explanation for why these invoices provided that description.[29]

In addition to tracking those songs "added" by radio stations such as WJKS, Mediabase and other services track "auto adds." For instance, when WJKS plays a song ten times "and does not log into the system to report 'adds' for the week, the 'auto add' is included in the data base [sic] based on monitoring of the station's airplay by Mediabase;" conversely, "if the station reports any 'adds' for the week or logs into the system and reports no 'adds' for the week, then no 'auto adds' will be included in the data base [sic] for that week."[30] It is my understanding from the evidence that "spins, " an important metric in the radio industry, are individual broadcasts of a record; "spins" accumulate to become an "add" on these reporting services.[31]

Receiving undisclosed payment for "adds and spins" constitutes payola, and is prohibited by federal law. Specifically, 47 U.S.C. § 317, entitled "Announcement of Payment for Broadcast, " provides, in pertinent part:

All matter broadcast by any radio station for which any money, service or other valuable consideration is directly or indirectly paid, or promised to or charged or accepted by, the station so broadcasting, from any person, shall, at the time the same is so broadcast, be announced as paid for or furnished, as the case may be, by such person . . . .[32]

Accordingly, this statute mandates that radio stations such as WJKS disclose any consideration received for "spins and adds."

Despite insisting that Q Media was charging for consulting services, Quartarone continued to describe the product sold by Q Media as "adds" for more than two years. Beginning in July 2005, however, Quartarone—purportedly after receiving advice from QC counsel—began to describe the services provided as "consulting" rather than "adds" on Q Media invoices.[33] For instance, Q Media invoices included descriptions such as "consulting Beyouce [sic]" or "consulting Jennifer Lopez."[34] Even after the invoices began to reflect a consulting arrangement, however, correspondence between Quartarone and Ventour, as well as a comparison of Q Media invoices and Mediabase records, indicate that Q Media was actually billing, and receiving payment for, services provided by the station, payment for which should have flowed to QC.[35]

In fact, the Plaintiff points out that most of the songs for which Quartarone is said to have provided "consulting" were added to the station's playlist, and thus reflected on Mediabase reports, within the same time frame.[36] Despite this correlation, Quartarone attempted to convey during his deposition that these adds were unrelated to his consulting. He explained, for instance, that the funds for consulting were often not available "until the add date was available, " which could have been "three or four or five weeks" after he consulted on that record.[37] He also testified that it could have been others at the station playing that music[38]—in other words, purely coincidental to any "consulting" payment—and noted generally that adds were sometimes automatic.[39]

Nonetheless, Quartarone admitted that he sometimes caused Q Media to erroneously bill for services that were provided by the radio station. However, he testified that, in those instances, he took corrective measures through a self-developed reconciliation process that, according to Quartarone, appropriately attributed payments to QC that were billed by and paid to Q ...


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