Monday, November 10, 2008

Fraudulent wine in contractual bottles?

Koch v. Greenberg, 2008 WL 4778813 (S.D.N.Y.)

Earlier opinion discussed here. Koch sued various defendants for fraud and consumer protection law violations over the sale of certain bottles of wine. According to the allegations of the complaint, Greenberg had one of the largest wine collections in the US until 2002, when he asked Sotheby’s to handle its sale. The head of its wine department, Serena Sutcliffe, told him many of his bottles were counterfeit, and Sotheby’s refused the commission. Greenberg then hired William Edgerton, a noted wine expert, who confirmed Sutcliffe’s conclusion on some of the bottles. Despite this, and after settling with a company that sold him the counterfeit wine, Greenberg consigned his wine to Zachys to sell at public auction in 2005. Koch bought some of the counterfeit bottles.

Koch alleged that the catalogue Zachys used to sell the wine contained false descriptions, which are attributable to Greenberg. The catalogue contained disclaimers and limitations of liability. Koch bought $3.7 million worth of wine, eleven bottles of which he now alleges are counterfeit or possibly counterfeit, with a purchase price of over $228,000.

Greenberg moved to dismiss on the ground that he had tendered Koch full payment plus interest and costs. However, Koch sought punitive damages, to which he might be entitled. The court rejected Greenberg’s argument that this was just a contract dispute that shouldn’t be recast as fraud. Though punitive damages aren’t available in an ordinary fraud case, they are when fraud is aimed at the public generally, evidences a high degree of moral turpitude, and demonstrates “wanton dishonesty” rising to the level of “criminal indifference to civil obligations.” Koch sufficiently alleged all these elements, especially given that Greenberg allegedly only sold his wine at auction after recovering a settlement from the company that sold the wine to him; that’s pretty wantonly dishonest. Thus, the tender of the purchase price didn’t justify dismissing the case.

Greenberg also argued that Koch couldn’t show fraud, specifically justifiable reliance. Though there was a disclaimer here, a disclaimer won’t defeat a fraudulent misrepresentation claim if the relevant facts are peculiarly within the defendant’s knowledge. Whereas Zachys didn’t know about the earlier inspections, Greenberg did, and thus the relevant facts were peculiarly within his knowledge; even had Koch inspected the wines beforehand, as he was invited to do, he wouldn’t have known about the earlier experts’ conclusions about dubious authenticity.

The court also refused to dismiss Koch’s claims under NY General Business Law §§349 and 350, prohibiting deceptive acts or practices and false advertising. Such claims must cover deceptive “consumer-oriented” conduct. Though Koch is rich and sophisticated, such consumers are also entitled to the protection of the law. Given the large number of bottles—17,000—Greenberg consigned to the auction, and given that Koch’s purchase of a small percentage contained counterfeits, it’s possible that other consumers were also harmed. Thus, the complaint sufficiently alleged a broad impact on consumers at large.

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