Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

Frequent readers will know that we have talked about Chinese drywall litigation and issues quite a bit here.  One of the ugliest cases was a builder who proactively repaired drywall issues having its initial complaint against its insurers who did not provide a defense thrown out on motion to dismiss.  The court originally found that the complaint failed to state a claim because the builder had not been sued and in essence the builder voluntarily made repair efforts in violation of the insurance policies.

Happily for Dragas, the court gave it leave to amend and it did so, alleging more facts regarding the threats of claims by home owners.  Dragas' claim has now officially survived a motion to dismiss.  While this is far from a victory, it does provide a bit of comfort to builders that they are not simply stuck with no path forward for coverage unless sued. 

Common sense and good policy certainly suggest that builders should be encouraged to solve problems rather than let them fester and worsen in the hope that they eventually get sued and an insurance policy is triggered.  Virginia law, however, is driven by contract and statutory interpretation rather than equitable consideration of good policy by courts.  Insurance coverage on construction projects is highly complex and poorly understood.  Look forward to us engaging in further discussion of this important issue moving forward.

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There is big news in the world of Chinese drywall litigation.  First, various news sources including the Miami Herald reported a $2.5 million jury verdict on behalf of a homeowner couple against Banner Supply, the supplier of the drywall.  The verdict is reported to include not just loss of use of the home and repair costs, but also stigma damages for loss of value to the property.  The jury may have become inflamed by the supply company's actions after having been informed of complaints.  According to CBS4 in Miami:

According to documents entered into evidence, when Banner Supply notified its Chinese supplier about the complaints, the supplier replaced the distributor's inventory of Chinese-made drywall with American-made drywall. In return, Banner Supply allegedly signed a confidentiality agreement not to say anything about it to the government or its customers.

This verdict is well in excess of the total of the $2.6 million verdict awarded to seven Virginia families by a New Orleans federal judge in April.  In the New Orleans case, Virginia Lawyer's Weekly reported last week that the Chinese drywall manufacturer finally entered an appearance in the New Orleans case ... to file a notice of appeal of the $2.6 million verdict.  We will await the legal arguments with interest, but absent a pretty significant service of process problem, it seems pretty hard to appeal a verdict after the case is over.  That train has seemingly left the station, although there are plenty of other claims pending in the overall class action in New Orleans and elsewhere.  Even an appearance by the Chinese entity may provide some hope of a ability to recover some measure of compensation as opposed to getting a judgment against a judgment-proof entity.

Finding defendants with deep pockets is critical to claimants as the coverage posture on these claims appears quite shaky.  Per Virginia Lawyer's Weekly, a Norfolk federal judge recently ruled that there is no coverage under home owner' policies for such losses.  As we previously discussed, another Norfolk federal judge previously ruled that a builder had failed to state a claim for coverage under its liability policies.  That case is still pending with leave to amend having been granted, pending amended claims having been filed, and the parties still in the briefing stages of another round of motions to dismiss.

These cases continue to attract commentary and interest, and we have commented on them with some frequency.  In the words of one longtime friend and insurance defense/coverage guru I know well, "These case dwarf anything we have seen before in the construction industry products liability arena.  There are literally millions of implicated defendants and parties."  Even with insurance coverage hurdles and questions of collection of judgments abounding, we can expect this topic to continue echoing for years rather than weeks or months.

Image by Matt Callow

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I spent this weekend thinking about the significant victory for Virginia home owners in the Chinese drywall litigation that was tried as part of the pending class action in New Orleans.  It may have mattered quite a bit that this ruling was issued in New Orleans as opposed to Virginia. 

I run the risk of delving into legal complexity, but it is necessary here to understand these issues.  We have talked about the economic loss rule several times here, in particular as it relates to products liability cases, and implications of classifying damages in such cases.  Those interested in design and construction issues in Virginia absolutely need to understand the economic loss rule.  The contours of this rule define who can whom and for what.  This rule is heavily briefed, argued, and litigated and can mean the difference between a big payday and a big goose egg.

It is clear in the Chinese drywall case that the home owners purchased a single unitary home from various builders and that one part of the home (the drywall) damaged others (piping, wiring, HVAC, et c).  There is a strong argument these cases fall under the clear mandate of the seminal Virginia case on this topic, Sensenbrenner v. Rust, Orling & Neale.  At least as to the home repair issues, the Sensenbrenner case would potentially eliminate all of the negligence based property damage theories of recovery for home repairs.

The remaining theories of recovery against remote manufacturers would be for breach of UCC warranties.  The next layer of analysis would be to evaluate whether the repair costs claimed are direct damages or whether they were consequential damages requiring privity of contract that are thus barred.  The products cases in Virginia have stuck to the statutory measure of direct damages which is the difference of the value of the product as warranted versus as delivered.

Reading the court's opinion issued last week in the drywall case, the court never discussed any of these issues.  The court discusses Virginia law, property damage, and recoverable measures of damages for property damages at length.  The economic loss rule is never mentioned, nor is the Sensenbrenner case, nor is the UCC line of cases on direct versus consequential damages.  Reviewing the cases and our previous posts, this case may have turned out very differently if tried in a Virginia court.

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As reported today by Virginia Lawyer's Weekly, seven Virginia families were awarded $2.6 million in damages by New Orleans federal Judge Eldon Fallon.  The whopping verdict allowed recovery of extensive damages, but denied recovery due to loss of value stigma damages to the homes in question.  In addition the opinion contains a number of interesting points and wrinkles that are worth highlighting.

1. The case was tried by default against the defendants.  A number of other interested parties initially intervened, then dropped back out of the case.
2. The case issued extensive scientific findings regarding problems with Chinese drywall (pp. 12-16); time will tell how much portability this court's factual findings have, particularly in light of the empty defense table.  The court's opinion suggests there was defense expert information presented for consideration by the intervenors.
3. The plaintiffs were able to convince the court that the drywall caused their home to be classified as a "severe industrial corrosive environment" (pp. 20-21) ... not exactly the place you want to raise your kids!
4. The court found that even in homes with mixed Chinese and non-Chinese drywall, all drywall needed to be removed.  This was both more efficient and eliminated identification problems.
5. Similarly, the court found that all electrical wire, copper piping, HVAC units, and extensive numbers of electrical equipment and appliances needed to be removed and replaced. 
6. Carpet, hardwood flooring, counter-tops, bathroom fixtures, trim, insulation, and cabinets need to be replaced; tile flooring that is damaged during remediation would also need to be replaced.
7. Post remediation, HEPA filtering and independent testing and certification is required.
8. The court calculated the remediation cost average at $86 per square foot.
9. The court analyzed each home owner's situation and awarded damages for repair costs, loss of personal property, economic losses caused by the disruption (such as foreclosure and bankruptcies), alternative living arrangements, and loss of use of the homes and personal property.
10. The court found that stigma loss of value damages were speculative and that the situation was repairable.  As such, the court refused to award damages on this point.

This is a very significant verdict.  It remains to be seen how the plaintiffs will covert this verdict into recovering actual dollars.

Image by xxandyshredxx

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We have seen waves of claimed problems with construction products over the last several decades: PVC plumbing fixtures and materials; fire retardant treated (FRT) plywood; exterior insulation and finish systems (EIFS).  We are on the front edge of another eruption with Chinese drywall, and indeed we have heard the first rumblings that the drywall problems may extended to materials manufactured in the United States.  It seems like the construction industry has become the Land of Misfit Toys from my favorite old school TV special, Rudolph the Red-Nosed Reindeer.  

Construction products liability cases present a very messy interaction between tort, contract, traditional economic loss principles, and the Uniform Commercial Code (UCC).  We have previously discussed Virginia's economic loss rule which basically provides that in order to recover economic losses, you need to have a contract with the party you are suing.  To understand the interplay, we need to get a little more technical than we usually do here on the blog. 

The UCC states at Section 8.2-318, "Lack of privity ... shall be no defense in any action brought against the manfuacturer or seller of goods to recover damages for breach of warranty, express or implied, or for negligence [.]"  That should end the issue on products cases as the statute is clear, right?

Wrong.  The Supreme Court of Virginia found in the Beard Plumbing case that with regards to claims for consequential damages, the consequential damage statute was more specific and controlled over the general "anti-privity" statute.  The consequential damage allowed recovery of losses known by the seller "at the time of contracting ".  Thus, the court ruled that to recover consequential damages under the UCC, the claimant still has to demonstrate privity of contract despite the UCC anti-privity statute.

Next time, we will talk about what are direct versus consequential damages, in particular as it relates to privity and economic loss.  Teaser: if the plaintiff is stuck with the direct damages as precisely defined in the UCC, the plaintiff is one unhappy camper on a construction case.

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Last week we discussed the first Chinese drywall case going to trial in January involves Virginia plaintiffs.  We have two interesting reports that may constitute both shoes dropping at once.

First, Engineering News Record reported on November 25, 2009 that a federal study, "found 'a strong association' between imported wallboard made in China and metal corrosion in U.S. homes in which the drywall has been installed." (subscription required).  These tests results appear consistent with prior testing finding the presence of corrosive chemicals in the Chinese drywall.  Other experts claim that the chemical levels are too low to cause injuries.  The Proskauer Rose firm has analyzed the federal testing results released by the U.S. Consumer Products Safety Commission (USCPSC) and found that, "Indoor testing ... detected little or no indications of various sulfur compounds[.]"(free sign-up required)

The real potential bombshell is that some homeowners have raised similar complaints of sulfur stench and corrosion, but they have no Chinese drywall ... they have American made drywall.  Scott Wolfson, spokesman for the USCPSC, is quoted in the Washington Post on November 25 as saying, "We are not limited in the scope of our investigation to just Chinese drywall."  One homeowner complaining of problems similar to those alleged in the Chinese drywall cases had testing performed on their drywall which was purely American manufactured.  The tests revealed the drywall was comprised of 50% cellulose.  A report from an MIT professor in the matter indicated that the cellulose compound in the US manufactured drywall was releasing sulfurous gases leading to causing corrosion.  University of Florida tests comparing US and Chinese drywall have found in some instances that US drywall released higher quantities of sulfurous gases than the much derided Chinese drywall.

Where does this leave us?

• Proof of causation of personal injuries on products liability cases is very difficult
• The pending Chinese drywall cases are apt to be hotly contested, but even with proof difficulties, any defendants with means should be scared to death of jury trials
• The focus on Chinese drywall may be obscuring a broader risk in the US manufactured drywall markets that has yet to full materialize

Image by Steevven

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The first trial in the infamous Chinese drywall litigation will apparently involve seven Virginia homeowners.  The first case is currently set for a bench trial on January 25, 2010. 

We have written several times regarding the Chinese drywall litigation, including several months ago in Mid Atlantic Construction.  While Virginia plaintiffs will apparently occupy the first position on the trial docket, our area in Northern Virginia has thus far been very quiet to silent on this front.  The Tidewater area has been a little different as a supplier there sold a fairly significant quantity of the drywall that was used locally.

The Chinese drywall is just the most recent wave of products liability litigation to erupt across the construction industry.  The past several waves, such as the fire retardant plywood, plumbing material, and EIFS systems litigation, each pointed out that getting around the economic loss rule in Virginia is extremely difficult.  The economic loss rule in Virginia provides that a party suing for "economic losses" is seeking a contractual remedy and must demonstrate privity of contract to recover.

The economic loss rule and its various permutations is one of the most important legal issues in construction litigation in Virginia.  As such, we are going to take the change to explore the economic loss rule and discuss it over several posts moving forward.

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