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Toxic drywall: Building a case

Toxic Chinese drywall (the small, gray sample) smells like sulfur; the large white piece is USA-made.

Whoever conjured up the phrase “toxic Chinese drywall” must have been prescient. No other word could describe the havoc that’s been caused so far by a single product that, in the total scheme of things, was used for a limited time within a certain geographical range. Yet the damage keeps spreading like a mushroom cloud, and some LBM dealers say they doubt they can outrun it. It’s only a matter of time before someone sues them, regardless of whether they sold drywall or where it came from.

So far, most of the large pro dealers, as well as Home Depot and Lowe’s, have been named as defendants in various Chinese drywall lawsuits. Smaller independents have been swept up too, along with the trades. “I got a call today from a Mississippi guy who said, ‘All I did was hang some drywall!’ ” recalled Bob Fitzsimmons, who is defending a large group of installers and contractors in one federal lawsuit. “People are finding out every day that they’re getting sued.”

Fitzsimmons is part of a federal multi-district litigation, or MDL, case that is seeking class-action status. His complaint was filed in the Eastern District of Louisiana against manufacturer Knauf Plasterboard Tianjin, and it lists the following as additional defendants: ProBuild, Stock Building Supply, 84 Lumber, Home Depot, Lowe’s and a number of smaller lumberyards in Louisiana, Mississippi, Alabama and Florida. L&W Supply, the distribution arm of U.S. Gypsum, is also named.

The Judicial Panel on Multidistrict Litigation has approved the transfer of all federal Chinese drywall claims to the New Orleans court. Others have already been settled, are in negotiations or have won awards from sympathetic juries.

One Miami jury awarded $2.4 million in damages last July to the owners of a home built with imported drywall purchased through Banner Supply Co. and manufactured by Plasterboard Tianjin. Earlier in April, seven Virginia families were awarded $2.6 million in damages and repair costs when they sued Taishan Gypsum Co., another Chinese manufacturer. Collecting from Chinese companies is expected to prove very difficult, however.

Lowe’s has offered $6.5 million to settle a class-action lawsuit filed in a Georgia state court. The attorneys who negotiated the deal will receive a separate payment of $2.1 million. Customers who purchased drywall from Lowe’s—approximately 40 have been identified so far, but that number should grow—will be compensated mostly with gift cards in the amounts of $50, $250 or $2,000. In extreme cases, a cash payment of $2,500 may be warranted, according to settlement terms. Accepting these payments means waiving the right to sue Lowe’s in the future over drywall-related damage or health claims.

The amount of the proposed settlement, which will go before a judge on Nov. 19, has ignited a firestorm among consumer advocates, who point out that the U.S. Consumer Product Safety Commission recommends removing the tainted drywall and any corroded wiring, a job that can cost $100,000 or more. Lowe’s plan to notify potential claimants through ads in Parade Magazine, as opposed to mailed notices, has also drawn criticism.

The retailer claims no responsibility for the toxic drywall in the settlement. Based on assurances from its vendors, Lowe’s stated that it never sold tainted gypsum board in any of its stores.

Lowe’s offer is running into resistance from the legal bar as well. A group of lawyers from the federal court in New Orleans have filed a motion to stop the settlement because Lowe’s is also named as a defendant in their MDL case. This issue has to be dealt with on a much larger scale than a small group of homeowners in a state court, they argue.

But the New Orleans judge also wants to downsize the case, or at least get a handle on how to resolve these toxic drywall cases. U.S. District Court Judge Eldon Fallon, who is overseeing the Louisiana MDL lawsuit, approved a settlement Oct. 14 involving 300 homes in four states: Alabama, Mississippi, Louisiana and Florida. Knauf Plasterboard Tianjin, along with suppliers and insurance companies, agreed to replace tainted drywall, corroded electrical wiring, gas tubing and affected appliances like air conditioners. They also agreed to pay relocation expenses. The cost of fixing a 2,500-sq.-ft. house is estimated at $150,000.

The settlement was devised by a special committee asked to come up with a “pilot remediation” plan. It does not address any health concerns related to the sulfurous smells associated with imported drywall. And it still leaves thousands of homeowners’ claims waiting to be resolved.

DEFECTIVE DRYWALL: WHO SHOULD PAY?

Homeowners with defective drywall now have several Facebook pages, and a recurring theme among the posts is how their insurance companies have abandoned them. Very few insurers have agreed to replace tainted drywall. In some cases, the companies have dropped homeowners or refused to renew their policies once they reported a claim.

Most affected homeowners have therefore turned to the courts. While there’s no reliable estimate on the number of lawsuits filed, the Consumer Product Safety Commission, which has received more than 3,600 complaints from 36 states, has been studying toxic drywall since the summer of 2009. One of the many issues being examined is how to identify the manufacturer of a particular sheet of drywall—especially in “checkerboard” houses built with wallboard purchased from different suppliers.

Homeowners aren’t the only ones having trouble with their insurance companies. ProBuild filed a lawsuit against 10 of its insurers last March in the U.S. District Court of Colorado, accusing them of bad faith for failing to provide defense and indemnification for Chinese drywall claims. According to the lawsuit, ProBuild and some of its legacy companies were named as defendants in more than a dozen state and federal lawsuits concerning drywall damage.

The case was voluntarily dismissed the following month.

Two heroes who’ve emerged from this morass are, surprisingly, Freddie Mac and the Internal Revenue Service. In June, Freddie Mac said it will allow borrowers to temporarily suspend or reduce monthly payments while they are repairing homes that contain toxic drywall. And Sept. 30, the IRS announced it will give a tax break to homeowners who need to replace drywall, wiring and other parts of a residence contaminated by defective drywall.

HarrisMartin Publishing puts out a monthly newsletter called “Chinese Drywall Litigation Report,” and on Oct. 28 the company held its third Chinese Drywall Insurance Conference in Miami. One hot topic this year: the growing number of lawsuits involving American-made drywall.

“Initially, the builders and drywall suppliers that were responding to these claims were quick to explain to the courts that the foreign manufacturer entities were pretty indispensable parties,” said Jeff Andrus, publisher of Chinese Drywall. “It will be interesting to see how the cases play out now that manufacturers have to some extent come forward and, at least in Knauf’s case, entered into agreements to remediate homes.”

Knauf has already reached an undisclosed settlement with Beazer Homes, which identified approximately 50 homes in Southwest Florida where defective drywall was installed in fiscal 2006 and 2007. An attorney for Knauf told The Wall Street Journal the company was negotiating with six to 10 other builders that had used its wallboard in their projects.

A number of home builders that used their own money to remediate problems with drywall may also seek redress. Lennar set aside $40 million in a warranty reserve in 2009 to do remediation work in 400 Florida homes built with defective drywall during 2006 and 2007. Other home builders are banding together with their customers. In one lawsuit, the home builders’ steering committee has indicated that it intends to align itself with plaintiffs and seek class status in claims against Knauf, Banner Supply and Taishan Gypsum Co.

So where does that leave the LBM dealers that tend to get lumped in with the “suppliers” on the defendants list?

“I’m just waiting to get sued. It’s just a question of when,” said a Southern Florida dealer who asked to remain anonymous. The fact that he never carried imported drywall probably won’t figure into the equation, he said.

“I keep getting calls from people who say they’re in marketing, and all they want to know is if I sell drywall,” he noted.

A Central Florida dealer remembers turning away a dozen truckloads of Chinese drywall in 2005, a time when wallboard was in short supply. But he knew that the product had come off a container ship that was sitting at Port Canaveral for a couple of weeks.

“We heard it had hit a typhoon on the way over and the drywall got soaked,” the dealer recalled. “Eventually they sold it, but at a very discounted rate. And the people who bought it? They had to know it was bad.”

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