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Chinese Drywall Litigation. The Half-Assed Defense And Why Seizing Assets Is Very Different From Seizing Ships. With Apologies To Scott Weinstein For Something I Never Said.

By Dan Harris and Steve Dickinson

A few months ago, I spoke in New Orleans at the leading Chinese Drywall Conference. I was introduced as the person who was going to explain whether it would be possible to sue and collect from the Chinese companies involved in providing the drywall that is estimated will end up costing between USD$15 and $25 billion to fix. I walked to the podium and began my speech by pretty much saying forgetaboutit. I then talked about various strategies for seeking to collect from Chinese companies and the strategies Chinese companies usually employ to defend against such lawsuits. One of the things I talked about was how the really smart Chinese company uses United States litigation against it to stall and maybe even to intentionally lose, on the merits. Here's how I have seen it work. US company sues Chinese company in a US court. US company tries to serve the Chinese company but fails to do so properly because it failed to comply with the Hague Convention on Service of Process. For more on the enforcement of the Hague Convention in US courts, check out, "Who Needs International/Foreign Law? Not Us, We're Americans." Now here is where the strategy comes in, and I am speaking here from having defended my share of foreign companies in United States courts. As the Chinese company dealing with an American plaintiff who has failed to comply with the Hague Convention Rules on Service of Process, you can do one of two things. You can let the improper service "slide," figuring you can always use that factor to prevent enforcement of the United States judgment at some later date in some other country (or maybe even the United States) or in China. Or, you can claim to the United States court that service was improper and the case should be thrown out against you, or, at minimum, delayed until proper service is effected. This is no small decision for a foreign company defendant and a whole host of variables go into making it, the most important being where you have your assets. If you are a Chinese company you know that Chinese courts do not enforce United States judgments, no matter how service was effected, so the decision is usually made to assert improper service in the United States court. But why bother when the US court judgment will never be enforced in China anyway? The answer is that though not enforced in Chinese courts, US judgments are enforced in the United States and also generally enforced in a few other countries as well, like Canada, the U.K., and South Korea. So by fighting the service issue in the US court, the Chinese company is, by spending very little money, buying considerable time to get its international house "in order" so that when a US judgment does eventually come down, well, lo and behold, the Chinese company against whom the judgment is taken no longer has any assets in any jurisdictions that can be seized using a US court judgment. Because service of process in China pursuant to the Hague Convention can take anywhere from three months to a year, forcing a US company to jump through that hoop can go a long way towards putting a case into deep freeze. Then, once proper service has been made, the Chinese company will fight on every issue and fight just hard enough to preclude summary judgment and force a trial. I have seen Chinese companies do this using some of the worst and least expensive lawyers known to man. But since the Chinese company has pretty much conceded defeat and is merely trying to buy the most time at the lowest cost, its choice of a terrible (but really inexpensive) lawyer is oftentimes not illogical. Then when the US company finally gets its judgment, the only way it can collect on it is to pursue the Chinese company's assets in China. But this is pretty much impossible. Chinese courts do not enforce US judgments. Repeat: Chinese courts do not enforce US judgments. So now the American company has its judgment against the Chinese company but no way to enforce it in China. So what can it do? Well it can try to seize assets of the Chinese company in some other country, but almost certainly the Chinese company has restructured its operations (remember the delaying/stalling part) so that it has no assets outside China. What about the American company suing the Chinese company in China? Well good luck with that, because if the American company does try to sue the Chinese company in China, the Chinese company will claim the American company cannot re-litigate its case in China after having already fully litigated it on the merits in the United States. The legal term for this is res judicata, which is a doctrine that prohibits a party from trying the same case twice. So losing in the United States court can actually be better for the Chinese company than not litigating in the US. Losing in the United States means the Chinese company has a judgment against it that can never be enforced and a weapon to prevent the US company from ever suing it again anywhere else. Which is likely to be considerably better for the Chinese company than if the US company had never sued it at all in the United States and had simply started out trying to sue the Chinese company in China. We have taken to calling this sort of supreme stalling defense the half-assed defense, and it really is very common and it was what I predicted we would likely see from some of the Chinese defendants in the Chinese drywall litigation. And we have. The Sarasota Herald Tribune just did an article, entitled, "Company Out of Drywall Trial," with the following as its lead sentence:

The Chinese company that was to provide the manufacturers' defense in a tainted drywall case shocked participants by dropping out the day before the trial began Friday.

Shocked? Why shocked? I would have been shocked if this Chinese company had put on a full-fledged defense with a top-flight legal team, because why should it. It probably assumes it is going to lose anyway and probably all it really needs to do is buy time and why pay the huge legal fees for a trial when it may actually be to their advantage to lose? Now for an apology to someone I had never even heard of until I read this Sarasota Herald-Tribune article today, entitled, "Drywall liability in courts." A reporter for the Sarasota Herald contacted me back in October, 2009, after I wrote a post, entitled, "Chinese Drywall Cases Make U.S. Lawyers Angry. I Want My Lex Americana!" In that post, I went after some Chinese drywall plaintiffs' lawyers for having proposed some pretty absurd methods for collecting from Chinese defendants:

The article talks about the 300 drywall lawsuits currently pending in New Orleans Federal Court and asks "who's going to be on the hook for any damages courts might award?" The article then outlines some of the tactics the plaintiffs' lawyers are considering for trying to collect and guess what? None make any sense. The lawyers are "considering" suing "U.S. investment bankers who financed the Chinese companies, and seizing ships that brought the drywall to the United States." With all due respect, the odds of either of these tactics generating any cash are pretty much zero. First off, it would surprise me if any of the Chinese drywall manufacturers were financed by "US investment bankers." Does anyone disagree with me on this? Second, I also doubt very much that any US court is going to set aside 200 years of US (and a couple more hundred years of British) jurisprudence and find the investors liable. I certainly hope not as I own shares in drug and tobacco companies and by this logic, I could be held liable for injuries caused by those companies. The arresting ships idea is probably even more ludicrous. What these lawyers are proposing is to do something that has, as far as I know, never been done anywhere in the world or at any time in the long history of shipping, and that is to find the shipper liable for having shipped a perfectly legal product. Not only has this never been done, but if it were done, it would probably destroy the shipping industry as we know it and, at minimum, raise the price of pretty much every single product worldwide. Can you even imagine a system where shipping companies are forced to guarantee the quality of every single item they ship? I can't and if any of my law firm's shipping companies get their vessels arrested over this, you can bet we will be counterclaiming for wrongful arrest. And it is not just plaintiffs' lawyers who are getting mad. U.S. District Judge Eldon Fallon found one Chinese company, Taishan Gypsum Co., in contempt of court for ignoring the suits. And though I am on record in this post ("China Tooling/China Consulting -- I Told You So") for stressing the importance of abiding by Federal Court orders, I do not for a minute believe the Taishan Gypsum is going to care one whit about what some U.S. judge has to say. If Taishan Gypsum conducts no business in the United States or in any of the very few countries that typically enforce U.S. money judgments (I very much doubt any country enforces U.S. contempt orders) U.S. court orders almost certainly mean little to nothing to it. Most US judgments against Chinese companies have no value beyond the Chinese company owner's belief that it will preclude his/her son or daughter from attending UCLA. The article then states how US lawyers "said Chinese companies are virtually insulated against liability in U.S. suits because suing them through international court is costly and time-consuming and civil judgments in U.S. courts are not enforced in China." I agree with the part about US court judgments not being enforced in China, but I do not know what they mean by an "international court." International courts are not going to take a drywall case so I am going to assume that Chinese courts was meant here. Again, these lawyers are wrong. Suing in Chinese courts is way cheaper and way faster than suing in US courts. The problem with suing in a Chinese court in a case like this is not the time or the cost, it is the damages. Chinese courts are incredibly stingy (by US standards) with damages for pain and suffering and lost profits. A win in a Chinese court might mean no more than a full refund for the cost of the drywall. But at least one lawyer believes the future for plaintiffs' lawyers in these drywall cases looks bright because....well....because he really really wants it to: Herman said plaintiffs' lawyers were up to the challenge. "I think we can bust the dam in this case," he said. "You're talking about billions of dollars" at stake, Herman said. "We're going to find some ways to make them responsive." I was interviewed yesterday by the Center on the Global Legal Profession and was asked what has surprised me in my practice of international law. Among my answers was how how so many American lawyers still refuse to recognize that foreign country's laws tend to be very different from ours and that U.S. law does not cover the entire world. As much as we U.S. lawyers (myself included) wish it would, it just doesn't and it never will.

This Sarasota Herald reporter emailed me again this week asking me if she could use what I had told her back in October for an upcoming story:

I interviewed you last October for a story I did on the difficulty of recalling Chinese drywall. I asked you about the federal multidistrict drywall trial in New Orleans and the plaintiffs' lawyers' idea to seize ships that bring drywall into the U.S., if Chinese manufacturers continue to thumb their collective noses at the courts. Well, in the just concluded first trial in New Orleans, more than one lawyer is again raising that specter. I didn't use your comments before because of lack of space and also, it deserves to be part of the litigation story. I'm doing a story in the next couple of days on the results of the first "bellweather" trial on the issue and what's next. I want to address the "seizing the ships" issue. Below are your comments taken in our phone interview in October. May I use some of them in the story? If not, would you allow me to interview you again for fresh quotes on the issue? Please let me know. Thanks very much, Mary Mary Wozniak Senior staff writer The News-Press Fort Myers, Fl. 239-339-1020 office 239-910-6140 cell mwozniak@news-press.com

I made a few minor tweaks to what she had down for me and then told her she could go with the following:

OCTOBER INTERVIEW Question was about an attorney on the plaintiff steering committee in multi-district drywall litigation in New Orleans saying that federal court should satisfy judgments against drywall manufacturers by seizing ships with manufacturers' assets. My quotes from you: "If he thinks the U.S. Courts are going to be willing to destroy international trade on this issue, I wish him all the luck in the world." "Think about it. Say you fly up to Seattle and you punch me, should I be able to seize the airplane you flew on?" "It's absurd. It's lunacy. And some of these shipping companies are huge Some are not Chinese. Some are Chinese. Some are Korean. Some are Dutch. It's crazy and no one has ever arrested a cargo vessel because some kid got injured by a broken bike seat on a bike that was shipped on the vessel"

But now the article has come out and it is ALL WRONG:

?If there?s any asset of a corporate defendant against whom we have a judgment, we would ask the court to enter an order and federal marshals would seize those assets,? Weinstein said. Other attorneys in the case have voiced similar opinions. But international law attorney Dan Harris of Seattle, who writes the China Law Blog, believes that idea is insanity. ?If (Weinstein) thinks the U.S. courts are going to be willing to destroy international trade on this issue, I wish him all the luck in the world,? Harris said. ?Think about it. Say you fly up to Seattle and you punch me. Should I be able to seize the airplane you flew on? ?It?s absurd. It?s lunacy. And some of these shipping companies are huge. Some are not Chinese. Some are Chinese. Some are Korean. Some are Dutch.?

I fired off the following email to the reporter a few hours ago, but have yet to hear back:

Mary, Your article regarding my quote is all wrong and here?s why. 1. It talks about seizing ships. 2. Weinstein then talks about seizing assets that belong to the defendants. 3. Then I say Weinstein is crazy. 4. I never said Weinstein is crazy. 5. What Weinstein is saying about seizing assets is not crazy at all. It makes complete sense. 6. What is being said (not by Weinstein) about seizing the ships is what is crazy. Would you please correct that as soon as possible and would you please forward this email to Scott Weinstein so he knows that I certainly never meant to diss him. Thanks. Dan

I cannot find Scott Weinstein's email address, so I am going to use this post to apologize to him. Mr. Weinstein, your plan to use the United States judgment to seize assets around the world seems to makes perfect sense to me. If you are planning to seize the ships hauling those assets, I would have issue with that. I never called you crazy. I never even thought you were crazy. In fact, before I read the article in which I called you crazy and then did an internet search on you, I did not even know who you were. I still do not think you are crazy and I certainly apologize for the fact that there is an article out there in which I am quoted as calling you crazy. I have written the reporter asking her to change the article and I am next going to write some of the editors at the paper itself in an effort to get the article changed. I am sorry this has occurred. For more on Chinese drywall and on enforcing US judgments against Chinese companies, check out the following: -- Who Needs International/Foreign Law? Not Us, We're Americans -- Suing Chinese Drywall Manufacturers. Why All The Bother? -- Will Your US Judgment Be Enforced Abroad? Not China, But Maybe. -- Enforcing Foreign Judgments in China -- Let's Sue Twice -- Taking Judgments To China (And Korea), Let's Not Sue Twice -- Chinese Drywall. If You Think That Is Bad.....Just Wait -- China Law. What's Insurance Got To Do With It? -- Chinese Drywall Cases. Show Me The Money!

Full post as published by China Law Blog on February 28, 2010 (boomark / email).