China's Latest Tainted Export: Toxic Drywall

Litigation surges over thousands of boom-era homes in the South that may harbor noxious, corrosive gases from gypsum mined in China

China has been blamed for a raft of dangerous exports to the U.S.—lead-tainted toys, melamine-spiked pet food, and contaminated blood thinners. Now one of the biggest homebuilders in the U.S. says defective drywall from China is the culprit for fumes that have damaged 400 houses in Florida.

It won't be easy for homeowners to collect damages. Many builders responsible for purchasing and installing suspect drywall have gone out of business during the recession, while others didn't keep sufficiently detailed records to track the origin of the drywall they placed, notes Jean Harrison, a senior partner who specializes in construction law at Nashville-based Harrison Law Group.

Hundreds of residents in Florida, Louisiana, and Virginia have been complaining since last year that noxious gases—apparently from bad drywall—have been corroding wiring, air-conditioner coils, light fixtures, and even picture frames in their new homes. They've also said the fumes have caused headaches, nosebleeds, and sore throats.

Lennar Set Aside $20.7 Million

On July 10, Lennar (LEN) confirmed in a filing with the U.S. Securities & Exchange Commission that it had determined the problems were due to defective Chinese wallboard in 400 Florida homes as of May 31.

The majority of complaints stem from residences built from 2005 to 2007, at the peak of the housing boom. Lennar has been gutting and replacing drywall in affected homes after consumers sign a document releasing the company from further damage claims. Lennar reported in its filing that it has set aside $20.7 million to cover the remediation.

Many more homes may actually contain substandard materials. An analysis by the Sarasota Herald-Tribune in February found that some 550 million pounds of drywall has been imported from China since 2006, enough to build 60,000 homes. Florida received the majority, according to the newspaper. Senator Bill Nelson (D-Fla.) has pushed for legislation to further test and possibly recall the tainted material.

The building complaints have resulted in a wave of lawsuits, including a class action filed against Lennar in March. Meantime the Miami-based company is suing 23 manufacturers, suppliers, and installers of drywall, while blaming the Chinese for the tainted material.

Tracking Gypsum to Shandong Province

In a July update of an ongoing investigation, the Consumer Product Safety Commission identified a mine in China's Shandong province as the source of fume-emitting samples of drywall. "In 2006 and earlier," says the report, "this mine was the sole source of gypsum used by a large manufacturer of plasterboard, which probably manufactured more of the drywall exported to the United States in 2006 than any other company."

It is possible, the report continues, that gypsum from other mines in the area may be similarly tainted.

But lawyer Harrison says it'll be a "nightmare" for plaintiffs to track a defective product's origin. "Drywall is not heavily inspected to begin with and when it gets into the stream of commerce, it gets mixed in with everything else," she says. "You'd have to identify the builder, who'd identify the supplier, who'd identify the distributor, and then the importer, and then the manufacturer. If it's coming from China, good luck!"

Lennar constructs homes in 17 states. It posted losses in 2007 and 2008 as revenue tumbled by almost 75% from its 2006 peak. The company's stock is down by half since last September. Still, investors seemed unconcerned by the company's disclosure, with Lennar shares gaining 1.8% to close at 8.47. Among other big homebuilders, Hovnanian Enterprises (HOV) jumped 8.4%, to 2.07, while Toll Brothers (TOL) slipped 0.3%, to 15.57.