Settling the Chinese Drywall Fight
[Update 1: Adds comment from Wells Fargo] Homeowners and builders are facing difficulties seeking recourse from manufacturers of a toxic drywall that’s been alleged to emit sulfur fumes, causing damage to heating, ventilation and air conditioning (HVAC) components and health problems ranging from watery eyes to respiratory issues. The problem? It's difficult for plaintiffs to serve foreign manufacturers in US courts. In this case, the problem with the manufacturers of Chinese drywall is exactly what you'd expect: the manufacturers are in China. Matt Jacobs is a Washington, DC-based attorney at Jenner & Block and specializes in representing builders in their efforts to obtain insurance coverage for the defense costs associated with responding to drywall-related litigation — and there is a surprising amount of it, particularly in the Southeastern region of the U.S. While homeowners are suing builders, the builders are attempting to sue manufacturers and distributors of the drywall. The builders, many times, aren't having much luck. “It is very difficult to pursue any foreign-based company because of jurisdictional limitations and the ability to get them into US courts and there’s always a problem executing a judgment against a foreign company,” Jacobs said. One company that’s emerged as a target is Knauf Plasterboard Tianjin (KPT), the China-based drywall subsidiary of German-based global construction materials firm Knauf. The firm is one of a number included in a complex lawsuit known as multidistrict litigation, or MDL, which is making its way through the US District Court for the Eastern District of Louisiana, in New Orleans. Thomas Martin is president of America’s Watchdog, an advocacy group that recently established the Chinese Drywall Complaint Center to organize homeowners who believe their homes were built with toxic drywall. “The Chinese culture, unfortunately, is not exactly the most transparent culture in the world, either in doing business or culturally speaking. They couldn’t be a worse defendant for US consumers,” Martin told HousingWire. “Knauf may be the only company that actually settles.” Martin said Knauf, one of the world’s largest drywall companies, is an easier target than other manufacturers because of its size and that it appears to be working to address homeowners’ complaints. Typically for a US person or company to sue a foreign entity, the suit must be served under Hague Convention guidelines ruling service of process abroad, which can cost as much as $20,000 per plaintiff. But in the MDL case in New Orleans, Knauf agreed to waive its service of process abroad rights for Chinese drywall homeowners that filed complaints with the MDL before December 2. More than 2,000 homeowners filed with the court. Doug Sanders, a lawyer representing KPT, said the decision to waive service of process aboard rights was made to help streamline and consolidate homeowners’ claims against the builder so it may defend itself, despite potentially exposing itself to additional risk. “The company made a decision to waive that requirement to try to collect in one place all the claims against it and be in a better position to address it efficiently and provide one forum to do that,” Sanders said. “There’s obviously increased risk there, but that’s the decision the company made. It’s certainly designed to streamline it.” For other homeowners whose homes weren’t built with Knauf drywall, things may be more difficult. Much of the defective drywall is not labeled and even if a homeowner can identify the manufacturer of the drywall, many foreign companies are simply ignoring suits filed against them. Making matters worse for homeowners, Martin said, is that insurance companies are dropping homeowners from policies after they make drywall claims. While this practice is illegal in most states, it is difficult for state agencies to regulate. “Anybody can understand why an insurance company wouldn’t want one of these houses,” Martin said. Lenders are also enacting new policies to limit their exposure to Chinese drywall. Martin said a source within Wells Fargo (WFC) told him the bank won’t refinance or originate a purchase loan unless an inspector certifies the home doesn’t contain defective drywall. “It makes sense,” Martin said. “Nobody is going to want to have these loans in their portfolio.” A Wells Fargo spokesperson denied that the bank has such a policy in place. “We do not require inspection for Chinese drywall. The only case where we’d follow up on it is if it’s disclosed on the purchase contract or if it surfaces on the appraisal,” the spokesperson said. Write to Austin Kilgore. The author held no relevant investments.