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The Mostert Group, LLC v. Mostert

Court of Appeals of Kentucky

October 20, 2017

THE MOSTERT GROUP, LLC APPELLANT
v.
PAUL MOSTERT APPELLEE

         APPEAL FROM FAYETTE CIRCUIT COURT HONORABLE THOMAS L. CLARK, JUDGE ACTION NOS. 06-CI-0292 AND 08-CI-06239

          BRIEF FOR APPELLANT: Richard A. Getty Danielle H. Brown Lexington, Kentucky

          BRIEF FOR APPELLEE: Frank T. Becker Lexington, Kentucky

          BEFORE: COMBS, D. LAMBERT AND NICKELL, JUDGES.

          OPINION

          COMBS, JUDGE.

         The Mostert Group, LLC, (TMG), appeals from an order of the Fayette Circuit Court granting partial summary judgment in favor of Dr. Paul Mostert. Based upon our review of the record and the applicable law, we reverse and remand.

         The facts material to the issue to be decided on appeal in this case are not in dispute. Mostert is a retired professor of mathematics. With the assistance of computer programmers at the University of Kentucky and funds from the National Science Foundation's Small Business Innovation Research Program, Mostert developed certain computer software and other technology and intellectual property for the purpose of collecting and analyzing data derived from video images of a Thoroughbred in motion. Mostert used the technology in the operation of a business that purported to utilize observations of a racehorse's "way of going" to evaluate its biomechanical efficiency in order to assist clients in their racing stock and breeding decisions.

         Mostert decided that the business should be operated as a limited liability company with multiple members. In October 2003, TMG was organized. At that time, Mostert and TMG entered into a "Contribution Agreement." Mostert agreed to contribute assets to TMG that included all of Mostert's rights to "computer and telecommunication equipment, software programs, source codes, object codes, information systems, proprietary interfaces, routines, modules, procedures, functions, program specifications and related documentation. . .." (Emphasis added.) In exchange, Mostert accepted 200 shares of stock in TMG; $64, 213.00; and a promissory note from the company.

         Pursuant to the terms of the parties' agreement, TMG executed a $500, 000.00 promissory note payable to Mostert. The final installment of the note's repayment was due on January 1, 2009. TMG's debt was secured by collateral that included "[a]ny and all rights of [Mostert] to the following 'Software, ' and any corresponding patents, trademarks and copyrights: . . ." A second agreement, "the security agreement, " entered into the equation. The security agreement specifically identified the "Software" as: the EquiTrax System; PalmProphet; Compute2000; Old LandScape Model; New LandScape Model; MareMatch 10.2; NetMatch; StalMatch12 Program; and The Mostert Business System.

         Under the express terms of the parties' security agreement, Mostert was permitted to perfect his security interest through his possession of the collateral. Mostert also retained possession of the source codes underlying the software products described in the security agreement.

         In 2006, TMG filed a civil action against Mostert. The complaint included claims for misappropriation of trade secrets; breach of contract; fraud; unjust enrichment; breach of fiduciary duty; and conversion. Mostert filed an answer and counterclaim. He claimed that TMG had defaulted on the security agreement and sought judgment and an order that TMG turn over the collateral to a receiver. TMG filed a motion seeking an order requiring Mostert to produce the source codes that he had agreed to transfer to TMG under the terms of the parties' Contribution Agreement. TMG's motion was denied.

         In a civil action commenced in 2008, TMG again alleged that Mostert had failed and refused to deliver the source codes correlated to the EquiTrax software as required by the parties' Contribution Agreement. TMG alleged that its inability to access the source codes had proven detrimental to its business since the software product could not be efficiently updated and enhanced without it. Finally, TMG alleged that under these circumstances and pursuant to the terms of the note, it was entitled to withhold the final installment of its indebtedness. TMG sought a judgment declaring that it was within its rights to withhold the final installment due on January 1, 2009.

         In response, Mostert claimed that he was entitled to retain possession of the source codes as collateral under the terms of the parties' security agreement. While TMG conceded that Mostert may have a security interest in the EquiTrax software product, it argued that he did not have a security interest in the source codes. Ultimately, the circuit court ordered that the 2008 action be consolidated with the 2006 action.

         In April 2014, TMG filed a motion for partial summary judgment on its claims that Mostert had breached the terms of the parties' Contribution Agreement by wrongfully retaining the source codes. Again, Mostert argued that the terms of the security agreement authorized him to retain the source codes as collateral until TMG had paid the debt in full. Following ...


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