During the 2004-07 housing boom, approximately 309 million square feet of Chinese-made drywall was imported into the United States. Since that time, nearly 1,000 lawsuits have been filed alleging that the imported drywall contains sulfur compounds which, when exposed to heat and moisture, release sulfurous acids resulting in the corrosion of metal components, such as copper wiring, refrigerator coils and the coils of air handling units. The drywall also emanates a noxious smell leading some to believe that the defective product may cause in health issues.

These lawsuits are generally being brought against the homebuilders. For example, Lennar Corp., a nationwide homebuilder, has been named in at least 41 state court cases in Florida alone, plus two Federal class action cases, forcing Lennar to set aside nearly $40 million in warranty reserves.

The difficulty that Lennar and other homebuilders face is where to turn for their own damage recovery. In nearly every case, the defective drywall was installed by a subcontractor with limited assets. Recovery from insurance is also proving to be difficult, as the insurance companies are denying coverage based on a common provision in general liability policies — the pollution exclusion. In many instances, a homebuilder’s only recourse may be against the manufacturer of the defective drywall; a foreign corporation with whom the homebuilder generally has no contractual privity.

Recovery from the manufacturer is the approach taken by Lennar. Lennar has brought claims in Florida state court of product liability and negligence against a Chinese drywall manufacturer. Since there is no contractual privity between Lennar and the manufacturer, any recovery will be limited to tort theories, and must overcome the economic loss rule (holding that mere economic losses are not recoverable in tort actions – only personal injury and property damage).

That the manufacturer is a foreign corporation makes matters considerably more uncertain. Service of process on the foreign company must be completed through the Hague Convention, which requires the use of intermediaries, and can take several months. Further, establishing jurisdiction may be a problem. To maintain its action in the United States, the plaintiff must establish that the foreign corporation has actively engaged in commerce in the state in which it is being sued. Simply placing the product in the stream of commerce, such that it eventually reached that state, is not enough. These jurisdictional issues coupled with issues of international law will make the pursuit and recovery from Chinese drywall manufacturers complicated.

By Andrew Ness and David Beck


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