Recourse Against Chinese Drywall Limited, Fitch Says

Struggling construction companies in the United States should not peg any hopes on getting much back from suppliers of Chinese drywall, if they plan to seek recourse through litigation, according to Fitch Ratings. But that is not stopping those living inside the property from doing the same thing. Lawsuits filed against domestic home builders claim the imported drywall emits sulfur gases, damaging air conditioning coils, electrical plumbing components and other materials, and cause health problems, Fitch wrote, leading the US Consumer Products Safety Commission (CPSC) to launch an investigation. In contrast, builder Lennar (LEN) used Chinese drywall in a small percentage of Florida homes built from November 2005 to November 2006, and sued Germany-based building supplies firm KnaufGips KG and its Chinese affiliates. But builders will have little recourse against the Chinese manufacturers, Fitch said, because they will likely ignore lawsuits filed against them in US court, as civil judgments in US courts are not enforced in China. Domestic builders do not have this option when disgruntled home owners file for compensation. In addition, international lawsuits are too costly and time consuming. But, Fitch said, lawyers may bring suits against US investment bankers who financed the Chinese companies and/or seize ships that brought the drywall to the US. More than 550 people in 19 states filed Chinese drywall-related complaints with the CPSC. The surge in imported drywall began in 2005 due to the housing boom and the rebuilding efforts after Hurricanes Katrina and Wilma, Fitch said. While the bulk of the Chinese drywall ended up in south Florida, it was also shipped to Alabama, California, Louisiana, Mississippi, and Virginia, among other states. The Gypsum Association estimates US builders imported 309m square feet of Chinese drywall from 2004 to 2007 — enough to build 35,000 homes. But that number could be higher as many homes were built with a combination of domestic and imported drywall. Fitch said builders like Lennar have already begun taking modest charge offs related to Chinese drywall repairs and large and small builders, subcontractors, and an international building supplier risk exposure to claims. Write to Austin Kilgore.

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