Claim for Breach of Fiduciary Duty of “Good Faith” Survives in the Face of “Sole and Absolute Discretion” Clause

Claim for Breach of Fiduciary Duty of “Good Faith”
Survives in the Face of “Sole and Absolute Discretion” Clause

      In a recent appellate decision from New York, claims for breach of fiduciary duty were allowed to proceed notwithstanding that the defendants were vested with “sole and absolute discretion” with respect to the complained of conduct. Shatz v. Chertok, 180 A.D.3d 609, 117 N.Y.S.3d 239 (N.Y. Sup. Ct. App. Div. 1^st Dept. 727, 2020).

      While the underlying facts are somewhat spotty, it appears that the plaintiff Shatz it was one of a member of investment funds controlled by Chertok and other defendants. Apparently, the fund in which Shatz was an investor was afforded a particular acquisition opportunity. Chertok and others apparently caused that opportunity to be diverted to another investment fund that they controlled, but one in which Shatz was not a participant. Shatz then brought this derivative action asserting claims for breach of fiduciary duty arising out of that diversion. 

      The defendants defended on the basis that the organic agreement of the investment fund vested in Chertok and others “sole and absolute discretion” with respect to a variety of matters including whether to pursue a particular investment. The court would reject the suggestion that the sole and absolute discretion shielded the defendants, at least at the level of a motion to dismissal, from potential fiduciary liability. Rather, in reliance upon Richbell Info. Servs. v. Jupiter Partners, 309 A.D.2d 288, 765 N.Y.S.2d 575 (1^st Dept. 2003), cited for the principle that discretionary contract rights cannot be exercised in bad faith so as to deprive the other party the benefits of the bargain, the suit was allowed to proceed.

      It is perhaps noteworthy that the court is treating the exercise of the discretion in bad faith as giving rise to a fiduciary claim for self-dealing. The court separately addressed a claim for breach of the covenant of good faith and fair dealing, and noted that it could be pled in the alternative or in addition to a fiduciary duty claim.