606 S.W.3d 87
Ky.2020Background
- Dr. Paul Mostert developed EquiTrax, a horse-biomechanics software, and in 2003 contributed assets to The Mostert Group, LLC (TMG) in exchange for 200 units, $64,000, and a $500,000 promissory note.
- The Contribution Agreement expressly listed both “software programs” and “source codes” among assets to be transferred to TMG.
- A contemporaneous Security Agreement secured the Note by granting Mostert a security interest in specified “software” (naming several programs) but did not expressly mention “source code.”
- Mostert retained the source code, TMG demanded delivery beginning in 2006, and TMG withheld the final note installment due Jan. 1, 2009; litigation followed and the cases were consolidated.
- The trial court granted Mostert partial summary judgment enforcing the Note; the Court of Appeals reversed, holding Mostert had no security interest in the source code and therefore breached the Contribution Agreement first.
- The Kentucky Supreme Court affirmed the Court of Appeals, holding the Contribution and Security Agreements’ plain language distinguished software from source code and that Mostert’s retention breached the Contribution Agreement, excusing TMG’s payment obligation.
Issues
| Issue | Plaintiff's Argument (TMG) | Defendant's Argument (Mostert) | Held |
|---|---|---|---|
| Whether "software" in the Security Agreement included "source code" so Mostert could retain it to perfect a security interest | Contribution Agreement separately lists source code; Security Agreement’s omission of “source code” means it was not collateral | "Software" broadly includes source code, so the Security Agreement’s reference to software covers source code | The court held the parties used "software" and "source code" as distinct terms; source code was not collateral under the Security Agreement |
| Whether Mostert’s retention of source code was a prior breach that excused TMG’s obligation to pay the final Note installment | Mostert breached first by refusing to deliver source code, so TMG was excused from payment | Mostert contended the Security Agreement entitled him to possess collateral until Note paid | Held for TMG: Mostert breached the Contribution Agreement first and thus could not demand the final payment |
| Whether allegations against Mostert could operate as a defense to enforcement of the promissory note (relying on cases about fiduciary-duty defenses to notes) | TMG argued breach of contract predated payment and is a valid defense to payment obligations | Mostert relied on Bale/Waxman to argue breaches/claims cannot defeat enforcement of a note | Court distinguished Bale/Waxman as involving fiduciary-duty defenses in bank-loan contexts and held they were inapplicable; Mostert’s contractual breach was operative |
Key Cases Cited
- North Fork Collieries, LLC v. Hall, 322 S.W.3d 98 (Ky. 2010) (contract interpretation starts with plain meaning of the parties’ language)
- Kentucky Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691 (Ky. 2016) (ambiguity requires reasonable competing interpretations; interpretation is de novo)
- Bale v. Mammoth Cave Prod. Credit Ass'n, 652 S.W.2d 851 (Ky. 1983) (breach of fiduciary duty cannot be an affirmative defense to enforcement of a note)
- Fifth Third Bank v. Waxman, 726 F. Supp. 2d 742 (E.D. Ky. 2010) (similar principle regarding fiduciary-duty defenses to note enforcement)
- Dalton v. Mullins, 293 S.W.2d 470 (Ky. 1956) (party first guilty of breach cannot complain if the other party then refuses performance)
- Wehr Constructors, Inc. v. Assurance Co. of America, 384 S.W.3d 680 (Ky. 2012) (courts will enforce unambiguous contract language as written)