by Christi-Anne H. Kudo Chock
As litigators, it is our job to know what laws apply to your business. While we are immensely proud of our successes at trial and have our fair share of Perry Mason stories about victorious courtroom performances (My favorite raconteur? Charlie Bocken, who argued and won the landmark property case, Kaiser Aetna v. United States, in the United States Supreme Court), proof of some of our finest work is that we never had to appear in court on a client’s behalf.
Our advice? Early consultation is good business. Lest you characterize that advice as merely self-serving or trite, consider the cautionary tale of drywall.
Sidebar: what is drywall? Find out here.
The past decade was, in the words of Charles Dickens, the best of times and the worst of times to be in the drywall business. According to Judge Eldon E. Fallon’s April 2010 decisions in Germano, et al. v. Taishan Gypsum Co. Ltd., et al. (Case No. 09-6687) and Hernandez v. Knauf Gips KG, et al. (Case No. 09-6050), the construction boom between 2000 and 2005 resulted in a shortage of building supplies. Contractors and developers turned to international suppliers to obtain the materials they needed to keep up with the growing demand for housing. Increased demand for drywall in particular after Hurricane Katrina hit in 2005, led some suppliers, including Florida-based Banner Supply Company (“Banner”), to sell Chinese drywall manufactured by Knauf Plasterboard Tianjin Co., Ltd. (a subsidiary of the German drywall-conglomerate the Knauf Group).
As early as 2006, people who owned homes constructed with tainted drywall manufactured in China began reporting noxious fumes that smelled like rotten eggs or fireworks, and that electrical wires, plumbing and ventilation systems continuously failed. Some even reported severe respiratory problems.
By June 2009, so many lawsuits had been filed that 9 class action suits were consolidated in a Louisiana federal court. In April 2010, Judge Fallon found that health problems and property damage were tied to high concentrations of sulfur in the tainted drywall. He ordered that the defendants (manufacturers including the Knauf entities, suppliers, importer/exporters, developers, builders, contractors and installers) remove and replace all of the drywall, as well as appliances, cabinets, electrical wiring, flooring and plumbing, in plaintiffs’ homes.Then, in June 2010, a Miami jury rendered a $2.4 million verdict for a Florida family whose dream home had been ruined by tainted drywall. Armin and Lisa Seifart v. Banner Supply Co. (Case No. 09-38337 CA 01 (42)) was the first drywall jury trial, and only one of many cases brought against Banner. The writing was on the wall. Days after documents in the Miami case had been made public by a Florida daily (including a confidential 2006 agreement between Banner and Knauf to remain quiet about tainted drywall), Banner entered into a settlement and agreed to pay $55 million to Florida homeowners. Banner then filed its own cross-claims against Knauf on July 13, 2011, asking that the manufacturer answer for its role in the drywall debacle. Based on information obtained during discovery, Banner alleges that Knauf executives knew about the sulfur and misrepresented known risks by claiming the smell was “no more than the difference between Chinese natural gypsum plasterboard and synthetic plasterboard.” Banner accuses Knauf of “cowardice and calculus” since the German parent and Chinese subsidiary have claimed they are not subject to U.S. jurisdiction and that no judgment could be enforced outside of the U.S.
As more of our consumer transactions become global ones, new issues arise regarding the enforceability of contractual expectations and parties’ rights in the event of a breach. Early consultation might have helped Banner understand the implications of imported drywall containing sulfur that exceeded federal and state regulations, as well as international standards for measuring environmental corrosive, or consider the ramifications of limited legal recourse against Knauf for breach of contract. Legal consultation might have led to more effective crisis control when the first shipment of drywall arrived from China, or in 2006 when Banner secretly agreed to accept Knauf’s misrepresentations (without conducting its own independent testing) along with a shipment of American drywall in exchange for its silence (Banner replaced some of the tainted drywall for those who had complained but never warned its customer base).
This cautionary tale is not limited to drywall manufactured in China. At least 97 homeowners in 4 states have joined lawsuits alleging similar claims against U.S. drywall manufacturers, including National Gypsum Company (one of the largest American manufacturers of drywall made with natural and synthetic gypsum). Synthetic gypsum made from coal ash raises new considerations about what laws and regulations should apply to what we can or should do with “recycled waste.” The U.S. Environmental Protection Agency announced the first-ever national rule to regulate toxic coal ash in May 2010 – well after many of the lawsuits involving American and Chinese drywall had been filed. Closer to home, a July 29, 2011, article in Pacific Business News reported that one of the business initiatives of newly formed Kokua Renewable Energy, Inc., a company focused on reducing waste accumulation in Hawaii, is to partner with other local organizations to recycle ash from the City and County of Honolulu’s H-Power plant.
What about insurance? Although the insurers in the Louisiana cases escaped liability under a “faulty materials” exclusion, a Virginia court recently ruled that damage that had resulted from tainted drywall constituted individual “occurrences” covered by a homeowner’s insurance policy. See Dragas Mgmt. Corp. v. Hanover Ins. Co., 2011 U.S. Dist. LEXIS 80178 (E.D. Va. July 21, 2011). Damon Key attorney Tred R. Eyerly, follows these issues on his insurance blog, which has been recognized by LexisNexis as one of the top 50 blogs about insurance law. See this post for more.
The moral of the story? Early consultation allows you to make an informed assessment of risk, and avoid or prepare for litigation in a manner that makes the most sense for your business. Let us help you ask and answer the right questions sooner rather than later.