## Facts

- C Tek Software, Inc. owned “ClienTrak,” a software program used by financial-services customers to store information and generate correspondence.
- On October 26, 1987, New York State Business Venture Partnership (NYSBVP) took and perfected a security interest in C Tek’s hardware and in “the source code and all ownership rights” to ClienTrak, including identified copyrights from 1983–1987.
- On June 17, 1988, C Tek entered a 10-year Master Distribution Agreement (MDA) with Intelligent Investment Systems, Inc. (IIS), granting IIS exclusive worldwide rights to sell and develop ClienTrak and authorizing IIS “to produce, copy, distribute and market derivative versions of the software and documentation without limitation.”
- The royalty structure decreased over time as IIS made changes to the software.
- At the time of the MDA, ClienTrak was version 3.7.2B; by trial, IIS’s work had advanced the program to version 4.1.8 through revisions to thousands of lines of source code.
- IIS’s changes were found to fall into: (1) bug fixes; (2) minor cosmetic user-interface changes; and (3) three major functional changes (import function, report customizer, and communications message exchange); no new modules were added.
- C Tek filed a Chapter 11 petition on April 6, 1989 and brought an adversary proceeding to determine lien validity, extent, or priority.
- In a prior ruling, the court held NYSBVP had a perfected security interest in ClienTrak, reserving for trial the extent of that interest in light of post-lien enhancements.
- The dispute at trial concerned whether NYSBVP’s lien reached IIS’s post-agreement modifications and, if not, which portions IIS owned as derivative works.

## Issues

1. Whether NYSBVP’s perfected security interest in ClienTrak’s source code and ownership rights extended to IIS’s post-MDA modifications, including bug fixes, cosmetic changes, and major functional enhancements.
2. Whether the MDA’s authorization to create and market “derivative versions ... without limitation” conveyed to IIS copyright ownership in its derivative contributions (as distinct from the underlying software).

## Decision

- The court held NYSBVP’s security interest covered the underlying ClienTrak program and changes that were effectively maintenance of that program (including bug fixes and minor cosmetic corrections).
- The court held IIS owned the copyright in the genuinely original, copyrightable enhancements it created (the three major functional changes), as derivative-work matter separate from the preexisting program.
- Accordingly, NYSBVP’s lien did not extend to IIS’s separable, original expression embodied in those enhancements, though NYSBVP retained its interest in the preexisting ClienTrak code and related ownership rights.

## Legal Principles

- Copyright in a derivative work protects only the original material contributed by the derivative author, not the preexisting work incorporated into it.
- A secured creditor’s perfected interest in software source code and existing copyrights attaches to the underlying program and noncreative corrective maintenance, but does not automatically capture distinct, later-created derivative enhancements authored by a third party.
- Contract interpretation may recognize a licensee’s proprietary rights in its derivative contributions where the agreement authorizes creation and commercialization of derivative versions without limitation and the compensation structure contemplates the licensee’s investment in improvement.

## Conclusion

The court divided rights in a software collateral dispute by treating bug fixes and minor cosmetic changes as part of the secured creditor’s collateral in the underlying program, while recognizing the licensee’s ownership of separable, original enhancements as derivative-work matter outside the creditor’s lien.


C Tek Software, Inc. v. N.Y. State Bus. Venture P'ship (In re C Tek Software, Inc.), 127 B.R. 501 (Bankr. D.N.H. 1991)