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Chinese Drywall Cases. Show Me The Money!

By Dan Harris and Steve Dickinson

The Wall Street Journal Law Blog did a post the other day touting Chinese drywall as the next big mass tort action in the United States. The post is entitled, "Does the New Product-Liability Boom Lie . . . Inside the Walls?" and to the extent it hints at a "yes" answer, it is likely going to be dead wrong. It is going to be wrong because it ignores one critical point. The US plaintiffs are not likely going to be able to collect anything from the Chinese defendants by suing in them in the United States and collecting from the German defendants is likely to prove difficult as well. WARNING: I am going to have to get rather technical in this post as there is really no other way to handle a subject as legalistic as enforcing a judgment overseas. Near as I can tell, the US drywall plaintiffs are mostly suing the Chinese manufacturers of the drywall and the name most often mentioned for that Knauf Plasterboard Tianjin Company. Additionally, the plaintiffs are also naming Knauf, a German company that appears to be the base for the Knauf empire worldwide. I have written many times on how US judgments are of virtually no value in China. Put simply, Chinese courts simply do not recognize them for anything. They cannot be converted to a Chinese judgment and they are not even evidence of anything. For example, see "Enforcing Foreign Judgments in China -- Let's Sue Twice" and "Taking Judgments To China (And Korea), Let's Not Sue Twice." Nothing has changed and I cannot see how a US judgment against a Chinese drywall manufacturer will have any value, unless the Chinese drywall manufacturer has assets in the United States or in some third country that will enforce the US judgment. It all reminds me of the melamine in pet food cases. I actually called one of the plaintiff's lawyers who was suing a Chinese pet food company and asked him how he planned to collect on any eventual judgment. His response: "to be honest, I haven't thought of that yet. I figured I would get the judgment first and then deal with it." Even if the plaintiffs succeed in finding Knauf Germany liable, they will still face some of the same issues in terms of taking the US judgment over to Germany to get it enforced. My law partner, Nadja Vietz, who is a licensed German (and Spanish) attorney, wrote a cover story on this just last month for the Washington Bar News. Her article is entitled "Will Your U.S. Judgment Be Enforced Abroad?" and it focuses on how to get US judgments enforced in Europe. Nadja starts the article describing an all too typical scenario:

My law firm is frequently contacted by U.S. lawyers with judgments they are seeking to enforce overseas. The lawyer is seeking our assistance to enforce its U.S. court judgment against a foreign company that did business with the lawyer's U.S.-based client. The procedural history is nearly always the same. The litigator served the defendant and, several months and many dollars later, he or she now has a U.S. judgment. When the foreign company refuses to pay even pennies on the dollar on the judgment, the litigator realizes the judgment will need to be taken overseas for enforcement. Only then (and usually not until we relay this information) does the litigator realize very few countries will enforce U.S. judgments. To have a chance at collection, the case often must be tried anew, only this time in a far less sympathetic forum.

Nadja then offers some suggestions on how to avoid these problems through better contract drafting, "emphasizing European and, particularly, German legislation." The problem with the drywall cases, however, is that there almost certainly is no contract between the homeowners and the German or Chinese drywall companies and the contracts between the US contractors and the drywall companies were probably not written with these sorts of cases in mind. Nadja explains how foreign courts do not even like US judgments:

The United States is not a party to any bilateral treaties or multilateral international conventions governing reciprocal recognition and enforcement of foreign judgments. The reasons for the absence of such agreements seem to be that foreign countries perceive U.S. courts (particularly U.S. juries) as granting excessive awards (particularly in tort cases and particularly with respect to punitive damage awards) and as too often asserting extraterritorial jurisdiction and disregarding international law. Absent a treaty, the question of whether the courts of a foreign country will enforce a U.S. judgment is governed by the local rules of the foreign country and by international comity.

Most countries do not enforce US judgments and they particularly do not like tort judgments, as they view US tort damage awards (which would most likely be the sort of award the plaintiffs in the drywall case will receive) as excessive:

Generally, U.S. judgments cannot be enforced in a foreign country without first being recognized by a court in that foreign country. The recognition and enforcement of U.S. judgments depend not only on the domestic law of the foreign country, but also on the principles of comity, reciprocity, and res judicata. Foreign courts generally do not recognize U.S. money judgments unless: (1) the U.S. court had jurisdiction; (2) the defendant was properly served; (3) the proceedings were not vitiated by fraud; and (4) the judgment is not contrary to the public policy of the foreign country. Most European countries have similar code provisions, setting forth something along the lines of these four rules, but enforceability of U.S. judgments still varies widely from country to country, even within Europe. Some countries tend to enforce U.S. judgments, and some countries virtually never do. It can generally be said that non-default judgments not involving tort claims or punitive damages are more likely to be enforced.

Nadja then sets out the three most common reasons for European courts refusing to enforce a US judgment: "when the U.S. court lacked jurisdiction, when the defendant was not properly served, or when there are public-policy concerns."

U.S. Court Jurisdiction European courts will not recognize U.S. judgments if the U.S. court lacked jurisdiction. Special attention needs to be paid to the fact that for purposes of recognizing foreign judgments, jurisdiction must be determined by the law of the European country, not by U.S. law. For instance, under the so-called "mirror-image principle," German law projects its own jurisdictional rules on the foreign court, which is then treated as having international jurisdiction if a German court would have had jurisdiction had the situation been reversed.

It can hardly be said to be clear that a German court would assert judgment over a US company that owned a Chinese company that sent drywall into Germany and so it is also quite possible a German court would deny enforcement of any US judgment against the German defendant in the US drywall cases. Surprisingly, US plaintiffs oftentimes fail to properly serve foreign defendants as well. They frequently just assume that personal service of the company at the company's main office will be sufficient, even though this usually is not the case. I will not go into the various service mistakes my firm has seen in those cases where we have been retained by other law firms to try to enforce a US judgment overseas, but I estimate that service has been done improperly in about half those cases. The German courts will also likely at least hesitate to enforce a drywall judgment on public policy grounds as well. Nadja sets out what is meant by "public policy" when it comes to European courts enforcing US judgments:

Public Policy.European countries will not recognize foreign judgments where doing so cannot be reconciled with their own laws. Enforceability will be denied if major principles, such as the violation of fundamental rights or fundamental principles of local civil procedure or the like, were disregarded by the foreign court that granted the judgment. Since punitive and treble damage awards are generally regarded as excessive and contrary to the public policy of most European countries, these almost always should be removed from the U.S. judgment before taking it to Europe for recognition and enforcement. Our experience is that the U.S. federal courts are quite willing to give a new judgment with these damages removed, so as to make their judgment more likely to be enforced overseas.

My concern in the drywall cases is that the US law legerdemain that will likely need to be employed to find the German company liable for what the Chinese company apparently did will be the exact kind of thing that a German court will find violative of Germany's public policy. Maybe I should call this lawyer and ask him to show me the money...........

Full post as published by China Law Blog on April 22, 2009 (boomark / email).