Contracts governing businesses or invest management often grant a fiduciary broad powers to manage the affairs of the business or the investment. A grant of such powers inherently calls for the fiduciary to be afforded some amount of discretion. In the context of managing a business or an investment undertaken by multiple stakeholders with sometimes competing views, the fiduciary needs to be able to make decisions, insulated from armchair quarterbacks. In an effort to maximally insulate fiduciaries from litigation exposure, some contracts grant fiduciaries “sole discretion” or something similar. While this broad language may mitigate the risk of a lawsuit from a business partner second-guessing a routine transaction, a recent decision has found that even unfettered contractual discretion might be trumped by an allegation that the fiduciary is self-dealing or has otherwise acted in bad faith.
The ‘Shatz’ Case
In Shatz v. Chertok, 180 A.D.3d 609 (1st Dept. Feb. 27, 2020), Daniel Shatz was an investor in a fund called Vast VI. The fund was structured as a limited liability company and subject to an operating agreement governed by New York law. The operating agreement gave the fund manager, Vast Ventures, “sole and absolute discretion” over the fund’s investment decisions.
