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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 17, 2019

Plaintiff Adequately Alleged Breach of Covenant of Good Faith and Fair Dealing Notwithstanding Clause Granting Defendant Sole Discretion in Taking Certain Action

On July 30, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Shatz v. Chertok, 2019 NY Slip Op. 32343(U), holding that a plaintiff adequately had alleged a breach of the covenant of good faith and fair dealing notwithstanding the existence of a contract, explaining:

Defendants Douglas Chertok and Vast Ventures LLC and nominal defendant Vast Ventures VI LLC (the Company) move for reargument of their motion to dismiss, which was denied to the extent that plaintiff was permitted to assert a single derivative claim for breach of fiduciary duty. Defendants contend that section 1.4 of the Company’s operating agreement, which provides them with sole and absolute discretion to select the Company’s investments, is an absolute bar to plaintiff’s claims. Ordinarily, defendants would be correct.

However, plaintiff’s well-pleaded, plausible allegations of bad faith and express misrepresentations–made for the purpose of diverting the investment opportunity in a company in which defendants had an undisclosed interest to another fund managed by them–states a claim for breach notwithstanding the absolute discretion clause.

Indeed, these sophisticated parties surely understood that while freedom of contract is paramount and that LLCs are creatures of contract that can modify or eliminate default fiduciary duties, the implied covenant of good faith and fair dealing can never be waived.

Simply put, as in Juniper, the allegations here clearly go beyond claiming only that defendants should be precluded from exercising a contractual right; they support a claim that defendants exercised a right malevolently, for their own gain as part of a purposeful scheme designed to deprive plaintiff of the benefits of the Company.

(Internal quotations and citations omitted).

The implied covenant of good faith and fair dealing is an important, if often misunderstood, part of New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where a party is being deprived of the benefits of its contract, even if you cannot point to a specific contract term that is being breached.

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