Fiduciary With Unfettered Discretion Cannot Exercise That Discretion in Bad Faith

On February 27, 2020, the First Department issued a decision in Shatz v. Chertok, 2020 NY Slip Op. 01383, holding that even a fiduciary with unfettered contractual discretion cannot exercise that discretion in bad faith, explaining:

The motion court correctly declined to dismiss the breach of fiduciary duty cause of action. In Richbell Info. Servs. v Jupiter Partners, the parties entered into a joint venture to acquire a company. Under the relevant agreement, the defendants had an "apparently unfettered" right to veto certain transactions. The plaintiffs alleged that the defendants had exercised their contractual veto power in bad faith as part of a secret scheme to deprive the plaintiffs of the benefits of the joint venture.

The Court in Richbell rejected the defendants' argument that their right to veto, which contained no limitations, barred the breach of fiduciary duty claim. The Court found that even where one has an apparently unlimited right under a contract, that right may not be exercised solely for personal gain in such a way as to deprive the other party of the fruits of the contract. Thus, even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party's right to the benefit under the agreement. Here, although defendants possessed sole discretion over investment decisions, the complaint sufficiently alleges that they exercised that discretion in bad faith and to self-deal. Thus, the fiduciary duty claim was properly sustained, despite the existence of the sole discretion clause.

Defendants maintain that Richbell is distinguishable because the agreement there did not include a sole and absolute discretion clause. Richbell, however, did not turn on the precise language contained in the agreement, but instead stands for the general principle that an explicitly discretionary contract right cannot be exercised in bad faith so as to deprive the other party of the benefit of the bargain. Defendants' reliance on Sullivan v Harnisch (96 AD3d 667 [1st Dept 2012]), and other cases, is unavailing because those decisions did not involve allegations of bad faith or self dealing.

(Internal quotations and citations omitted).

Fiduciaries have special duties and complex commercial litigation often involves allegations of a breach of those duties. We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of trustees and professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.