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Homeowners Win Chinese Drywall Settlement

January 31, 2012

A proposed class-action settlement reached in a Louisiana court could compensate thousands whose homes were allegedly ruined by contaminated drywall imported from China, the New York Times reports.

Knauf Plasterboard Tianjin, a Chinese affiliate of Germany's Knauf Gips KG, would give cash settlements or pay to replace the drywall in affected homes. Some plaintiffs lawyers said the settlement cost could reach $1 billion.

Thousands of lawsuits were filed against KPT and other Chinese makers of drywall installed during the mid-2000 building boom when domestic drywall supply ran short.

Homeowners, many in Southern states, complained of rotten-egg odors and sulfuric acid that corroded pipes and electrical wiring. Some 5,200 plaintiffs alleged their homes contained the affected drywall, and about half provided evidence.

The settlement does not cover homebuilders, insurance firms, and suppliers that used KPT drywall and spent money to provide remedies on their own. KPT has reached reimbursement agreements with top homebuilders and is still negotiating with other parties.

Great Drywall of China

August 2009

In early June attorney Scott Weinstein stepped to the podium at a litigation conference in Orlando, Florida, carrying a large piece of drywall in a plastic bag. A month before, Weinstein said, building inspectors had sawed two samples from his client's $1.5 million guesthouse?one piece for state and federal investigators, and one piece for the conference. As Weinstein unsealed the bag and passed the sample around, the smell of rotten eggs spread through the room.

"The sulfur fumes were pretty strong," recalls Weinstein, managing partner at the Fort Myers office of Morgan & Morgan. "Some people wouldn't even touch it. On one side of the drywall you could still see the manufacturer's name: "Taishan Gypsum Co. Ltd., China."

According to plaintiffs attorneys, the housing bubble didn't just produce toxic assets?it produced toxic houses. During the peak boom years, from 2004 to 2007, U.S. suppliers couldn't produce enough drywall to keep up with demand. So an estimated 550 million pounds of it were imported from China, about 60 percent coming through Florida ports, to build tens of thousands of homes along the Gulf Coast.

But something wasn't right about the imported materials. According to test results released in May by the U.S. Environmental Protection Agency (EPA), Chinese drywall contains various sulfur compounds and ten times the amount of strontium found in domestic drywall. In the hot, humid conditions of the Gulf Coast, those impurities release hydrogen sulfide, carbonyl sulfide, strontium sulfide, and carbon disulfide gases. The result is a rotten-egg smell and, eventually, sulfuric acid, which corrodes copper and brass. Home inspectors in south Florida have found evidence that Chinese drywall is associated with corroded electrical systems, smoke alarms, air-conditioner coils, natural-gas furnaces, home appliances, and copper pipe.

In 2006 homeowners in Florida began complaining. This February the first individual lawsuit was filed alleging that the defendants negligently manufactured and sold defective drywall that corroded plumbing, air conditioning, and electrical components, and caused coughing and irritation of sinuses, eyes, and throats. That same month Lennar Homes, the nation's second-largest home builder, also filed suit against more than a score of drywall manufacturers, suppliers, and installers. Hundreds of individual suits and at least eight class actions have since been filed, primarily in Florida, Louisiana, and Texas. On June 15 the Judicial Panel on Multidistrict Litigation chose U.S. District Judge Eldon E. Fallon of New Orleans to consolidate the cases (In Re Chinese Manufactured Drywall Products Liability Litigation, J.P.M.L. No. 2047 (transfer order)).

Currently, investigations of Chinese drywall are being conducted by the Consumer Product Safety Commission, the EPA, the Centers for Disease Control, the Department of Health and Human Services, and the Florida and Louisiana departments of health. Members of the Florida congressional delegation have introduced the Drywall Safety Act of 2009, which would require a study of Chinese drywall installed from 2004 to 2007, testing of imported drywall, and an interim ban on drywall that contains more than 5 percent organic compounds.

At this stage, how sulfur and strontium impurities got into the imported drywall remains uncertain. It may be that the chemical compounds occur naturally in gypsum rock mined in China. Or they could have been introduced into the drywall as filler?most commonly, recycled fly ash scrubbed from the stacks of Chinese coal-burning power plants. "Until discovery, no one except the manufacturers knows the source of the compounds," Weinstein says.

So, who pays damages and remediation costs? Probably not the Chinese manufacturers. To pursue them, litigants would have to locate exporters, serve a translated summons and complaint, establish personal jurisdiction over the manufacturers, prosecute the case in China or secure a judgment in a U.S. court, and then attempt to either enforce the judgment or seize company assets abroad.

"The Chinese courts give a foreign judgment no credence," says Dan Harris, a principal in Seattle's Harris & Moure, which has a presence in China but handles no drywall cases. "One night at a dinner, about eight of us sat around debating which was worth more?a U.S. judgment in China or toilet paper? Toilet paper won."

Several of the manufacturers named in the drywall cases are Chinese subsidiaries of Knauf Gips KG, a German corporation. But Harris says that's not likely to be of much help. "Even Germany will look long and hard before enforcing a foreign judgment," he says.

Still, Donald B. Brenner, chair of the construction law group at Stark & Stark in Lawrenceville, New Jersey, says there are reasons to pursue the manufacturers. "You sue the Chinese company because it's probably insured," says Brenner, who publishes the Construction Litigation Law blog. "But you won't find out if there's coverage until discovery."

In February, MSNBC reported that a plaintiffs lawyer in Florida received a letter from one of Knauf's Chinese subsidiaries stating that it carried no insurance. And even if coverage does exist, plaintiffs attorneys anticipate insurer defenses under a pollution exclusion?which could incorporate toxic drywall?or a building-materials exclusion.

But Brenner isn't deterred. "It's our belief that the parent company, Knauf Gips, has very substantial policies," he says. "In addition, under New Jersey law, if the manufacturer is not available, then the distributor can be made to stand in its place."

Right now nearly all the links in the Chinese-drywall supply chain are suing each other, anticipating liability for at least remediation. Kristen E. Law, a partner at the San Francisco office of Lieff Cabraser Heimann & Bernstein, says her firm is partnering with an Alabama law firm to represent a class of plaintiff home builders. "Because so many entities are involved ..., the lines are not clearly defined as to who is a plaintiff and who is a defendant," Law says.

Lennar Homes has begun remediation voluntarily, paying to move affected residents from their homes and replacing drywall. Says Weinstein, "We [plaintiffs] and Lennar have more in common than not. We're sharing information and tracking drywall shipments. But there are problems with what they're doing?there aren't any standards yet for what is acceptable remediation, and they could be destroying evidence."

So far, California firms have participated primarily as co-counsel. But America's Watchdog, a consultant to law firms in class actions, reports that Chinese drywall entered the ports of Long Beach, Oakland, and Seattle/Tacoma between 2003 and 2007. The group says it has discovered Chinese drywall in homes built in Phoenix, Tucson, Riverside County, Fresno, Stockton, Sacramento, and far northern California.

"I am not aware of any cases filed with California plaintiffs," says Lieff Cabraser's Law. "But that may be related more to the low humidity here. We still have a lot to learn about the defects alleged."

Back on the Gulf Coast, the chances of timely recovery for many residents are slim. "I talk to homeowners all day who don't know what to do," Weinstein says. "They can't afford to move out and live elsewhere, they can't pay for remediation, and their houses are worth far less than what they paid for them. At this point, there is no remedy. It's tragic."

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