U.S. Chinese Drywall Victims Face China’s Legal Wall of Immunity

More than a year after suing the Cabinet agency that oversees China’s biggest state-owned companies, lawyers for people who say their homes were ruined by drywall made in China are still trying to get the lawsuit served on the State-Owned Assets Supervision and Administration Commission.

And six other defendants – sued, like the Cabinet agency, as parents of the company that made the drywall – say they’re shielded because they’re Chinese government agencies.

U.S. District Judge Eldon Fallon is considering damages for as many as 4,000 homeowners who say sulfur emissions from drywall made by Taishan Gypsum Co. Ltd. ruined their homes and belongings. Damages could be well over $1 billion, say attorneys for plaintiffs in Virginia, Florida, Alabama, Mississippi, Louisiana and Texas.

Earlier this year, Taishan paid seven Virginia homeowners and their attorneys $2.7 million plus about $500,000 interest.

Fallon heard arguments earlier this year about whether those figures, with modifications for costs in different areas, can form the basis for awards in a class action lawsuit.

The judge scheduled arguments for Dec. 8 about whether China New Building Materials Group and five related companies should be dropped from the suit.

He also recently ruled that the homeowners’ attorneys may go through diplomatic channels to serve the lawsuit on the Cabinet agency, which supervises China’s 117 biggest state-owned energy, manufacturing and other enterprises, including China National Petroleum Corp., China Mobile Ltd., and Air China Ltd.

Generally, foreign governments are immune from civil lawsuits. However, the Foreign Sovereign Immunities Act provides nine exemptions, including commercial activity – the most litigated exception, according to the Federal Judicial Center’s 2013 guide to the law for judges.

Diplomatic channels are the last option. An attempt to serve the lawsuit under the Hague Convention was rejected.

A copy sent by Sandra Duggan, an attorney for the homeowners, showed the commission’s notation that it “is the Chinese central government agency which shall enjoy sovereign immunity and not be subject to foreign jurisdiction.”

The Chinese government in Beijing also refused to accept a registered mail package of the lawsuit, associated papers and their translations into Chinese, Duggan said.

She said lawyers have given the U.S. District clerk of court in New Orleans two copies of those papers to be sent through diplomatic channels.

“Now we just have to wait a little bit more,” she said.

She said she cannot comment about the motion to drop China New Building Materials Group and related companies from the lawsuit until plaintiffs’ attorneys file their response, due Oct. 27.

In addition to claiming immunity, the companies say they shouldn’t be part of the lawsuit because they were just investors – some of them indirectly – and have had nothing to do with either drywall or business in the six states involved.

“In blunderbuss fashion, Plaintiffs have sued everyone under the sun,” their attorneys wrote. “All but explicitly invoking the bogeyman of ‘China, Inc.,’ they have sued not just the companies alleged to have engaged in wrongdoing – specifically, manufacturing and importing defective drywall – but also companies that merely invested in those principal defendants; companies that invested in the companies that invested in the principal defendants; and completely unrelated companies in which those investors hold some stake.”

If Fallon rules that they can be held liable, it could still be difficult to get evidence.

“I think it’ll be an uphill battle,” said Dennis Shea, vice chairman of the U.S.-China Economic and Security Review Commission.

The commission recently released a report about legal dealings with Chinese banks and other businesses in the U.S. financial services sector, titled “China’s Great Legal Firewall.”

China and the U.S. have signed the Hague conventions – the standard international protocols for serving legal papers and getting evidence.

But, policy analyst Kevin Rosier wrote, “China interprets its obligations under these treaties in a manner that effectively protects Chinese firms from U.S. litigation.”

He said it can take more than a year to get any response to a request for evidence.

“It is not unusual for no reply to be received or after considerable time has elapsed, for Chinese authorities to request clarification from the American court with no indication that the request will eventually be executed,” Rosier wrote.

Associated Press business reporter Joe McDonald contributed to this report from Beijing.