Source Code
Software
Contract Interpretation
Source Code not Included in the Term Software
Contract Drafting
Internet Law
Kentucky Law
Security Agreement
Security Interest
Collateral
Fiduciary Duty (No Fiduciary Duty is Owed Here)
(…) Despite these documents, Mostert and TMG disagreed as to which property constituted the collateral under the Security Agreement and the relationship between the parties deteriorated. More specifically, TMG claimed entitlement to immediate possession of the source code under the Contribution Agreement while Mostert claimed that he had a security interest in the source code which the Security Agreement allowed him to perfect by possession.
The primary issue in this case turns on construction of the Contribution Agreement and the Security Agreement, both executed by the parties on October 31, 2003. Mostert argues that the “software,” identified as collateral in the Security Agreement includes the source code, and therefore the Security Agreement allowed him to retain possession of the source code until the Note was paid in full. TMG counters that the source code was not included as collateral under the Security Agreement, and that Mostert breached the Contribution Agreement by failing to deliver the source code immediately upon execution of that agreement and receipt of his TMG stock. Before turning to the language of the relevant agreements, we acknowledge the general principles of contract construction which guide disposition of this matter.
(…) As this Court has stated, “the fact that one party may have intended different results . . . is insufficient to construe a contract at variance with its plain and unambiguous terms.” Abney v. Nationwide Mut. Ins. Co., 215 S.W. 3d 699, 703 (Ky. 2006).
(…) We turn to the documents executed by Mostert and TMG. Two contracts, the Contribution Agreement and the Security Agreement, reflect the parties’ agreement with respect to entitlement to and possession of the source code at the center of their dispute.
The Contribution Agreement provides for the transfer of assets from Mostert to TMG in exchange for the agreed-upon compensation. That agreement begins with the following “Recitals”:
Whereas, [Mostert] has created certain computer software and other technology and intellectual property for the analysis of horses for racing and breeding purposes, including but not limited to the EquiTrax Technology, a technology for capture and analysis of digital streaming images of racehorses in full gallop, and [Mostert] has been using all of such property in the operation of a business under the assumed names of “The Mostert Group” and “Equimost” (the “Business”);
Whereas, [Mostert] now desires to operate the Business through a Kentucky limited liability company and has formed [TMG] for that purpose; and
Whereas, [Mostert], who collectively owns 100% of the Business, desires to contribute to [TMG] any and all right, title and interest that it may have in any Assets (as defined herein), including without limitation all assets of [Mostert] used or intended to be used in the Business, in exchange for 200 Units in [TMG] and a Promissory Note from [TMG] in the form attached hereto as Exhibit A (the “Note”), all on the terms and subject to the conditions contained herein.
In the “Agreement” section, paragraph 2, the Contribution Agreement states:
Effective as of the date hereof, [Mostert] hereby contributes, transfers, assigns, conveys and delivers to [TMG] all of such [Mostert’s] right, title and interest in and to all of the assets, properties and rights primarily used or employed, or intended by [Mostert] to be primarily used or employed, in connection with the Business (the “Assets”), consisting of those assets listed on Schedule 2A attached hereto.
The referenced Schedule 2A, entitled “Partial List of Contributed Assets,” identifies in paragraph 2.1 the following assets to be transferred and delivered by Mostert to TMG : “all of [Mostert’s] ownership or leasehold rights, as the case may be, in computer and telecommunication equipment, software programs, source codes, object codes, information systems . . . ,” etc. (emphasis added). In paragraph 3 of Schedule 2A, additional assets to be transferred and delivered are identified including “any and all rights of [Mostert] to the following software and other property, and any corresponding patents, trademarks and copyrights: a) Equitrax System . . . .” Thus, pursuant to the aforequoted paragraph 2 of the Contribution Agreement, Mostert agreed to “contribute, transfer, assign, convey and deliver” the identified assets to TMG, effective as of October 31, 2003, the execution date of the Contribution Agreement.
The $500,000 Note issued by TMG to Mostert that same date was secured “as described in that certain Security Agreement of even date herewith by and between the Payee [Mostert] and the Maker [TMG].” The Security Agreement grants Mostert a security interest in specified collateral. It states in relevant part:
This Security Agreement is made as collateral security for the payment and performance of all the following obligations:
$500,000.00 Term Promissory Note. [TMG’s] payment of that certain Term Promissory Note payable to [Mostert] dated effective as of the date hereof in the original principal amount of $500,000.00 (the “Note”) . . . .
The Security Agreement identifies the covered collateral on Schedules A and B. As relevant to the parties’ dispute, Schedule B, lists “any and all rights of [Mostert] to the following ‘Software,’ and any corresponding patents, trademarks and copyrights . . . . ” (emphasis added). Schedule B, a one and one-half page single-spaced document, then continues with a list of the specific “Software,” which includes the EquiTrax System, Palm Profit, Compute 2000 and other named software. Finally, pertinent to our review, Paragraph 4(b)(i) of the Security Agreement provides:
TMG shall have possession of the Collateral, except where expressly otherwise provided in this Security Agreement or where [Mostert] chooses to perfect its security interest by possession.
Faced with two contracts executed by the parties simultaneously, we look to the language employed in those contracts.
The Contribution Agreement, lists “software programs” and “source codes” (followed in the next paragraph by a reference to “software” and a listing of specific programs) as distinct properties that Mostert was obligated to contribute to TMG. By contrast, the Security Agreement only identifies certain named “software” as collateral securing TMG’s performance pursuant to the Note; no mention is made of “source code.” Much of Mostert’s argument centers on his assertion that it is generally understood that “source code” is encompassed within the broader term “software,” and therefore, any reference to “software” in the Security Agreement would necessarily include the source code. In short, he maintains that the term “software” always includes the source code, so it follows that he retained a right to possess the source code to perfect his security interest. In support of this argument, Mostert references dictionary definitions of “software,” the Code of Federal Regulations and federal caselaw. Resort to secondary sources, however, is not appropriate if we can interpret the parties’ intent from the language they employed. North Fork Collieries, 322 S.W.3d at 105; Ky. Shakespeare Festival, 490 S.W.3d at 694. Resolution of this case hinges on interpretation of the language used in the Contribution Agreement and the accompanying Security Agreement, making external definitions offered by Mostert immaterial.
Here, the parties specifically listed source code, object code and software as distinct items in the Contribution Agreement. Schedule 2A paragraph 2.1, as discussed above, specifically states that assets contributed by Mostert to TMG include “all of [Mostert’s] ownership or leasehold rights, as the case may be, in computer and telecommunications equipment, software programs, source codes, object codes, information systems,” etc. (emphasis added). In the subsequent full paragraph, paragraph 3, additional assets to be contributed are listed and they include “any and all rights of [Mostert] to the following software and other property, and any corresponding patents, trademarks and copyrights: a) EquiTrax System . . .” (emphasis added). A plain reading of the documents thus reveals that the parties recognized and intended a difference between the broader term “software” and the more specific “source code.” Applying this reasoning to the Security Agreement leads to the conclusion that Mostert did not have a security interest in the source code and thus was not entitled to possess it, i.e., he had no right to perfect a security interest in property not covered by the Security Agreement. This conclusion is premised on the simple fact that the source code carefully delineated in the Contribution Agreement is not mentioned in the Security Agreement. To read the broader term “software” to encompass the source code would require us to ignore how the parties themselves used terms in the documents they executed.
Moreover, it is clear that the parties never intended the Security Agreement to mirror the Contribution Agreement such that Mostert retained a security interest in every single item he was obligated to contribute, transfer, assign, convey and deliver. The Security Agreement identifies the following software as collateral: EquiTrax, PalmProphet, Compute2000, Old Landscape, New Landscape, MareMatch, NetMatch, StalMatch, the Mostert Business System, and various databases. By contrast, Schedule 2A of the Contribution Agreement lists the contributed assets as including “software programs, source codes, object codes . . .” and in a separate paragraph further down lists “the following software,” which includes all the software listed above, as well as other property. Thus, several additional assets beyond the source code at the center of this litigation are listed in the Contribution Agreement but omitted from the list of collateral in the Security Agreement. This demonstrates that the parties did not intend for the Security Agreement to mirror the Contribution Agreement or, stated differently, TMG did not grant Mostert a security interest in all of the items he was obligated to transfer under the Contribution Agreement, the source code being but one example.
Based on the plain language of both agreements, Mostert agreed to transfer the source code, and by refusing to relinquish possession he breached the Contribution Agreement. Another “fundamental principle in the law of contracts” is that “before one may obtain the benefits the contract confers upon him, he himself must perform the obligation which is imposed upon him.” West Ky. Coal Co. v. Nourse, 320 S.W.2d 311, 314 (Ky. 1959).
In Dalton, 293 S.W.2d at 476, the court noted that when one party refused to perform under a written contract, the other party “had the right to treat this action as a breach, to abandon the contract, and to depart from further performance on his own part and finally demand damages.” That is exactly the procedure TMG employed.
(…) No fiduciary duty is owed by either party to the other in this case but the parties did have contractual obligations as discussed.
(…) We note that both parties raise issues regarding the classification of “software” under Article 9 of Kentucky’s Uniform Commercial Code and whether possession is a valid method of perfection. Given our resolution of this case, we do not reach that issue.
(Supreme Court of Kentucky, March 26, 2020, Paul Mostert v. The Mostert Group, LLC, Docket No. 2017-SC-000600-DG, to be Published)
No comments:
Post a Comment