December 6, 2010

Chinese Drywall Update

By  Michael D. Shaw

As we approach the end of 2010, it seems appropriate to take another look at the saga of tainted and corrosive drywall—a problem affecting an estimated 100,000 homeowners. Although there have been many developments in the past several months, and any number of experts, faux experts, and concerned officials have weighed in on the matter, the amount of positive impact on these homeowners has been very limited.

Perhaps Macbeth said it best: “It is a tale told by an idiot, full of sound and fury, signifying nothing.”

Yes, there has been some tax relief, and yes, there have been some legal settlements, but for the vast majority of affected homeowners—whose insurance excludes tainted and corrosive drywall damages—these remedies are not nearly enough. In at least one case, though, people fought back.

That would be Glen Vereen, on behalf of himself and all others similarly situated, v. Lowe’s Home Centers Inc., Muscogee County (GA) Superior Court case No. SU10-CV-2267B, better known as the Lowe’s settlement. The original settlement established a fund of $6.5 million for the plaintiffs, but provided no more than $4500 in Lowe’s gift cards and cash to an individual plaintiff, while providing an incredible $2.1 million in fees to the plaintiff’s attorneys.

Since a typical remediation will cost $100,000, you might ask how such a pathetic settlement was ever approved. Simple. Plaintiff’s counsel cut a separate deal with Lowe’s for their fees, and thus encouraged their hapless clients to go for the sucker bait.

I’m told that in many cases, when the plaintiffs found out about this sordid arrangement, they were fine with it. That’s because they were assured that no attorneys fees were coming out of “their” settlement. Thus, Lowe’s decides to allocate $8.6 million to this matter, but puts $2.1 million of it in a separate fund for the attorneys, leaving $6.5 million to the plaintiffs. Yet, the plaintiffs’ recovery is somehow unaffected.

Believe it or not, some people can actually be this stupid. Some, but fortunately, not all.

Based on public outcry, Lowe’s amended its settlement in late October so that plaintiffs are now eligible for up to $100,000 in cash. Credit the good work of Joaquin Sapien, ProPublica, and Aaron Kessler, Sarasota Herald-Tribune. Also involved was construction industry consultant and consumer advocate Michael Foreman, who has been working with tainted drywall since August, 2008.

Then there’s the so-called Knauf settlement, which is actually a remediation demonstration project covering 300 affected homes. According to U.S. District Judge Eldon Fallon, the pilot program “[L]ooks like it is working and expanding.” Knauf Plasterboard Tianjin Co. is one of the Chinese companies implicated in supplying tainted and corrosive drywall.

Foreman wonders how well it’s really working. “For one thing, qualification for remediation is at the sole discretion of Knauf, and will require that you have at least 95% Knauf product in your home. Based on my experience, very few homeowners would qualify at this level. Perhaps a pro rata deal will be put together, but, again, that is at their sole discretion.”

Foreman continues: “What’s worse is that you have to stay off the property while they are doing the remediation and apparently, there is no guarantee. Many questions come to mind regarding the details of their remediation process, and there are few answers forthcoming. Based on what I do know, the methods do not seem to be adequate.”

Here again, the plaintiff’s lawyers were compensated separately. Indeed, there was a mad rush to sign up the lucky 300 homeowners, and the fees were paid based on the number of signers. Informed sources say that remediation is underway on only a handful of the 300 homes. Are many of the signers getting cold feet?

The best tax relief to come along so far is Florida’s measure HB 965, which requires appraisers to reduce the assessed values of single-family homes with imported drywall, defined as that containing elevated levels of elemental sulfur that results in corrosion of certain metals. If the home is unlivable unless it is remediated or repaired, it must be valued at $0.

This is welcome news for the homeowners, of course, but may prove disastrous to the taxing entities, especially those containing thousands of affected homes such as Lee County.

A relatively new wrinkle is the matter of bank-owned homes with tainted drywall, which are being sold “as is,” at discounted prices. Under this designation, no disclosures have to be made. Possibly, the real estate agent is aware that certain builders, when informed of a tainted drywall house, will provide free remediation. Such builders include Lennar, Beazer, Pulte, D.R. Horton, and Taylor Morrison.

But will the banks try to get their pound of flesh here? And, how will this play out amid the current foreclosure mess and bailout scandals? Stay tuned.