August 10, 2015

The Evolution of Drywall Litigation

Collette A. Brown and Ira J. Gonzalez – August 10, 2015

News of defective Chinese drywall captured headlines in 2009 shortly after the housing boom across the country. In what seemed like an overnight phenomenon, the influx of Chinese drywall in the United States grew to over 500 million pounds from a minimal presence prior to that time period. In no time, Chinese drywall was estimated to have been used in more than 100,000 homes, including houses built after Hurricane Katrina. By 2010, the Consumer Product Safety Commission (CPSC) had received 3,602 incident reports from 38 states, the District of Columbia, Puerto Rico, and even American Samoa about the defective drywall. More than 90 percent of the complaints came from five states: Alabama, Florida, Louisiana, Mississippi, and Virginia.

Lawsuits against manufacturers, builders, and suppliers were first filed in January 2009. See Allen v. Knauf Plasterboard Tianjin Co., No. 2:09-cv-00054 (M.D. Fla. Jan. 30, 2009). Hundreds more followed. In June 2009, the Judicial Panel on Multidistrict Litigation ruled that all pending and future federal court lawsuits alleging damages from Chinese drywall had been consolidated in the U.S. District Court for the Eastern District of Louisiana in New Orleans. To date, over 700 builders, suppliers, installers, and insurers, including manufacturer Knauf Gips KG and its related entities, have reached settlements with certain classes of plaintiffs in the multidistrict litigation (MDL). In re Chinese Manufactured Drywall Prods. Liab. Litig., No. 2:09-md-02047 (E.D. La. Feb. 7, 2013), ECF No. 16570. The settlement is estimated to exceed $1 billion dollars.

However, not all named defendants have participated in the MDL. Since 2009, the Chinese government-owned drywall manufacturer Taishan Gypsum Co. has sought to avoid claims brought against it by homeowners alleging that the company sold defective drywall. As a result of Taishan's failure to appear or respond to multiple lawsuits, several default judgments were levied against the company.

In 2010, Taishan sought to overturn a $2.7 million default judgment obtained by Virginia plaintiffs related to the sale of defective drywall. In re Chinese Manufactured Drywall Prods. Liab. Litig., 742 F.3d 576 (5th Cir. 2014). Taishan claimed that the court did not have personal jurisdiction over it. In January 2014, the Fifth Circuit upheld the default judgment. The court found that Taishan's conduct was sufficient to satisfy each prong of the personal jurisdiction test because it designed its products for Virginia residents, contracted with a Virginia company to sell drywall to Virginia residents, and sold its products to Virginia residents. In re Chinese Drywall, 742 F.3d at 589–93. The court also found that Taishan failed to meet its burden to prove that its failure to respond to the complaint in a timely fashion was excusable and denied Taishan's request to vacate the judgment. In re Chinese Drywall, 742 F.3d at 595.

Similarly, in May 2014, the Fifth Circuit also ruled against Taishan in related Florida and Louisiana appeals of default judgments. In re Chinese Manufactured Drywall Prods. Liab. Litig., 753 F.3d 521 (5th Cir. 2014). In the appeal, Taishan argued that the lower courts lacked jurisdiction because only its wholly owned subsidiary, Tai'an Taishan Plasterboard Co. (TTP), had contacts with the Florida and Louisiana plaintiffs, and TTP's contacts could not be imputed to Taishan for the purposes of personal jurisdiction. The court disagreed and found that TTP functioned as Taishan's alter ego. The court explained that Taishan's creation of TTP, Taishan's placement of its employees on TTP's board of directors, and Taishan's direct dealings with TTP were enough to impute the subsidiary's contacts to Taishan for the purposes of personal jurisdiction. In re Chinese Drywall, 753 F.3d at 531–34, 547–48. The court also found that Taishan had sufficient contacts with each state because, among other reasons, Taishan sold thousands of sheets of drywall in each state and negotiated with Florida and Louisiana companies in order to facilitate the sales. In re Chinese Drywall, 753 F.3d at 547–48.

In July 2014, the MDL court sanctioned Taishan after the company failed to attend a judgment debtor hearing and failed to pay the Virginia default judgment. The court held the company in civil and criminal contempt and barred it from doing business in the United States until it appeared in court to answer questions related to its failure to pay the $2.7 million default judgment. In re Chinese Manufactured Drywall Prods. Liab. Litig., No. 2:09-md-02047 (E.D. La. July 17, 2014), ECF No. 17869. Taishan eventually paid the judgment.

In September 2014, the MDL court certified a class of over 3,500 plaintiffs across the United States who alleged that Taishan manufactured or sold defective drywall. The class seeks damages in excess of $1.2 billion. In May 2015, Taishan sought to decertify the class, arguing that the plaintiffs could not establish classwide damages using a mathematical formula. The MDL court has yet to issue a decision.

Another Chinese government-owned entity, Beijing New Building Material Group Co., also sought to exit the MDL, alleging that it neither manufactured nor marketed drywall during the years at issue in the litigation. The company's motion to dismiss for lack of jurisdiction, filed in April 2015, is currently pending before the MDL court.

In the meantime, the ramification of the defective drywall continues to be felt in certain sectors of the nation. For example, just this year, a luxury condo tower in the Brickell area of Miami, Florida, found defective Chinese drywall in 29 of its units, which will cost $3.3 million to have removed and replaced. Most attribute the recent increase in "new" Chinese drywall discoveries to the backlog of foreclosures that for years had been stuck in judicial proceedings or languished on a financial institution's books, which are now catching attention as the real estate market continues to recover.

As the narrative continues to develop in the ever-evolving purview of Chinese drywall litigation, time will tell whether finality is in sight for all interested parties.

Keywords: litigation, products liability, Chinese drywall, multidistrict litigation, settlement, default judgment, personal jurisdiction

Collette A. Brown and Ira J. Gonzalez – August 10, 2015