Update: Chinese Drywall Litigation Continues

Update: Chinese Drywall Litigation Continues

Recent developments have resolved many of the previously open questions concerning allegedly contaminated Chinese drywall as to both liability and insurance coverage. Settlement efforts by one of the primary manufacturers have also helped provide clarity and predictability. In this Commentary, Nicholas Insua, Jason Alexander and Michael Smith summarize the problem, the governmental response, and litigation trends stemming from Chinese-manufactured drywall as the issue moves towards resolution. They write:

I. The Chinese Drywall Problem

     In the mid-2000s home building soared across the United States, fueled in part by a strong economy and in part by reconstruction in the wake of several devastating hurricanes. The housing boom created a shortage of American made drywall, and contractors turned to China to meet their demand. Unfortunately, much of the Chinese drywall differed from American drywall. Chinese drywall contained excess hydrogen sulfide, sometimes in quantities 100 times greater than its American made equivalent. The excess hydrogen sulfide allegedly led to a spectrum of problems ranging from an odor of rotten eggs to the corrosion of copper wiring and other metals and fixtures in the homes in which the drywall was installed. Further, those who came in contact with the product complained of deleterious health effects including itchy eyes, cough, bloody noses, persistent headaches and respiratory difficulties.

     Complaints began to surface in late 2008, although it is now clear that problem drywall was used in the construction of houses starting in 2001 and ending as late as 2009. In early 2009, the Consumer Products Safety Commission ("CPSC") was appointed to lead an investigation with assistance from the Environmental Protection Agency, the Centers for Disease Control and Prevention, and the Federal Trade Commission, among other federal agencies. To date, the CPSC has logged almost 4,000 complaints arising from 43 states, as well as the District of Columbia, American Samoa and Puerto Rico. Although the problem is geographically widespread, the vast majority of complaints have come from the Deep South, with over 50% of the complaints originating in Florida.


C. Chinese Drywall in the Courts

     The influx of Chinese drywall and resulting problems led to a host of litigation. At the base level, homeowners sued the contractors who constructed their homes and sought coverage from their homeowner insurers. Contractors sued their subcontractors, suppliers, and general liability insurers. In some instances, insurers sued their policyholders in declaratory judgment actions seeking rulings that they have no defense or indemnity obligations. Suppliers sought coverage from their insurers even as they brought suit against the manufacturers. Liability moved its way up the chain. Time has brought some clarity to the picture, with liability now resting largely on manufacturers (where they have acknowledged the American litigation), and in some instances on insurers, depending on the exact language of the policy issued, and the state in which the case was litigated. This section examines the major developments on the legal front of the Chinese drywall problem.

A. Multi-District Litigation Generally

     On June 15, 2009, faced with an avalanche of drywall complaints, the Judicial Panel on Multidistrict Litigation transferred all federal cases alleging damages from Chinese-manufactured drywall to the Eastern District of Louisiana, under the care of Judge Eldon Fallon. Multidistrict Litigation ("MDL") is enabled by 28 U.S.C. § 1407, which states that MDL is appropriate where "civil actions involving one or more common questions of fact are pending in different districts." The Judicial Panel's website describes the purposes of this "centralization" procedure as "to avoid duplication of discovery, to prevent inconsistent pretrial rulings, and to conserve the resources of the parties, their counsel and the judiciary." Importantly, all "transferred actions not terminated in the transferee district are remanded to their originating transferor districts" for purposes of trial.

     The Chinese Drywall litigation was perfect fodder for Multidistrict Litigation. As of November 16, 2011, the MDL comprised 304 cases, with 41 additional cases already settled, dismissed, or otherwise disposed of. As will be discussed, the MDL has resolved important issues of fact, and helped clarify the liability picture in this otherwise murky and confused situation. Although MDL does not include cases originated in state courts, even those cases frequently rely on the reasoning and factual findings of Judge Fallon of the Eastern District of Louisiana.

(footnotes omitted)

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