Koch brothers David and William are as well known for their art patronage as certain parts of the family are for political activity, and a decision yesterday by the Second Circuit involving William Koch could extend that influence.  While the case concerned two dozen bottles of allegedly counterfeit wine, the implications on terms of sale and disclaimers will be felt in sales of fine art in New York as well.

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William Koch sued Eric Greenberg, Zachys Wine & Liquor Stores, and Zachys Wine & Liquor Auctions, alleging that the defendants knowingly sold Koch 24 fake bottles of Bordeaux at a 2005 auction.  Among those wines that Koch alleged were not what they were represented to be, were an 1811 Château Lafite Rothschild, 1864 and 1865 Chateau Latour, and a 1921 magnum of Pétrus.  Specifically, Koch alleged that Greenberg had specifically been told by an expert at Sotheby’s that the wines were inauthentic, yet consigned them for sale anyway.  Moreover, Koch alleged, Greenberg had pursued the company that sold him the wines on that very basis, and reached a settlement.  Koch discovered all this when he hired the very same expert, who noted the same bottles she had seen in Greenberg’s cellar after Koch had purchased them.

The claims were for common law fraud (namely, that Greenberg had knowingly made a false statement of fact on which Koch reasonably relied), negligent misrepresentation, and a violation of § 349 and § 350 of the New York General Business Law, New York’s consumer protection statute and false advertising statute, respectively.  Greenberg countered that Koch’s agreement to purchase the property “as is” mooted any other claims, and expressly overrode any warranties under the Uniform Commercial Code, including of “merchantability, fitness for a particular purpose, correctness of catalogue description, size, quality, condition, rarity, importance, provenance, exhibition history, literature, previous storage condition or historical relevance of any property.”  Greenberg argued, relying on the U.C.C., that this provision and Koch’s ability to inspect the wine extinguished any warranties.

A jury awarded Koch $12.4 in 2013—$12 million of which comprised punitive damages—which the trial judge reduced to $1.15 million ($711,622 of which were punitive damages).  Post-trial, Koch settled with Zachys.  Greenberg appealed to the Second Circuit.

In a summary opinion, the Second Circuit affirmed the District Court’s verdict and judgment.  Regardless of the merits of the U.C.C./”as-is” argument, the appeals court found, disclaimers will not absolve a seller of intentional fraud.  The jury having found that Greenberg had “peculiar knowledge” about the authenticity and provenance of the wine, an appeals court will not revisit that factual conclusion absent a “complete lack of evidence,” nor that Koch’s reliance was unreasonable as a matter of law.  Appeals courts are extraordinarily deferential to jury verdicts on the question of facts, and so it was here.

By now you may be rubbing your eyes and asking if we’ve rebranded as the Wine Law Report.  We have not, but the point is that as tangible property, the same U.C.C., contract, and fraud principles apply to fine art.  Indeed, if you did a find and replace one the above substituting “art” for “wine,” it would be the same.  Greenberg and Zachys had excellent disclaimer language, which as they eloquently argued, is enforceable.

But that is a question of contract.  And whether for wine, or fine art, or cars, or anything else that has unique value, sellers cannot avoid specific knowledge to the contrary if they proceed to sell an object as a particular thing.  In one sense “tell the truth” is not complicated or controversial advice (the appeals court stated “Given the evidence that the defendant intended to sell counterfeit wine, at auctions aimed at the public, no manifest injustice exists in the imposition of a punitive damages award”), but it can be more complicated than that.  It also counsels caution in surveying the range of facts known to the seller.  Make sure that the disclosures and statements don’t aren’t mutually exclusive with what you know.