In a decision released on January 28, 2014, the U.S. Fifth Circuit Court of Appeals affirmed the decisions of a Louisiana Federal District Court and held that U.S. Courts have jurisdiction over defective Chinese drywall claims filed by Virginia homeowners against China-based manufacturer Taishan Gypsum Co. Ltd (TG). The three-judge panel also ruled that the district court did not abuse its discretion in refusing to vacate a Default Judgment against TG.
TG entered into agreements with Venture Supply, Inc., a Virginia company that distributes drywall and other building materials to customers in multiple states, including Virginia. Under the agreements, TG manufactured and sold over 200,000 sheets of drywall to Venture. In addition, TG included custom imprinting on the sheets that it sold to Venture and cut them to Venture’s specifications.
In 2009, a group of Virginia homeowners initiated a class action suit against TG, claiming that they suffered property damage and health issues as a result of exposure to the allegedly defective drywall manufactured by TG. A federal district court issued a default judgment against TG arising from TG’s failure to appear in the action and granted a motion to amend the complaint to expand the plaintiff class to a nationwide class. TG filed a motion seeking to have the default order vacated, arguing that the court lacked personal jurisdiction and the service of process was procedurally defective because it had not been served with the second amended complaint.
The federal district court rejected TG’s jurisdictional argument, finding that TG placed its drywall into the stream of commerce with the knowledge that it would end up in and be used in Virginia. Furthermore, the claims against TG arose from or related to TG’s contacts with Virginia. Finally, the district court concluded that exercising jurisdiction was fair. TG appealed.
On Appeal, TG argued that the district court should have followed the Fourth Circuit’s more stringent method for determining personal jurisdiction instead of the Fifth Circuit’s precedent.
The appellate panel agreed with the findings of the district court, holding that under either the stream-of-commerce test utilized by the Fifth Circuit or the stream-of-commerce-plus test applied by the Fourth Circuit, the defendant’s contact with the forum state was sufficient to establish personal jurisdiction. Here, through its own acts, the defendant connected its product to Virginia and ensured that the product’s end-users would identify its product with a Virginia resident. The imprinting of Venture’s name and phone number on the drywall sheets was the additional conduct needed to satisfy the more stringent requirements of the Fourth Circuit.
The court found that TG’s contacts with Virginia stem from its sales to Venture, and the basis of the suit is that plaintiffs’ Virginia homes were allegedly injured by TG’s drywall, which only ended up in the plaintiffs’ Virginia homes as a result of TG’s sales to Venture.
TG further argued that the default judgment is void because TG was not properly served with the second amended complaint or a motion to intervene. The Court rejected this argument, finding TG was already in default when the district court granted the motions to file another complaint and the motion to intervene. The Federal Rules of Civil Procedure do not require that a party in default be served with a pleading unless that pleading asserts a new claim for relief. Plaintiff Intervenors needed only to serve TG with the Second Amended Complaint and motion to intervene if either pleading raised new claims. The appeals court agreed with the district court’s conclusion that the second amended complaint raised identical claims as those in the First Amended Complaint.
Finally, the appeals court rejected TG’s argument that the district court abused its discretion in declining to vacate the default judgment. The Court analyzed, based on Rules 55(c) and 60(b), whether or not good cause existed for the district court to set aside the entry for default judgment. The Court rejected TG’s argument that its default was based on its unfamiliarity with US litigation practice and was therefore not willfull but excusable neglect.
The Appeals Court stated that TG’s conduct between service of the first amended complaint and issuance of the default judgment did “not demonstrate that its default was excusable.” It “waited nearly a year after it was served to file a notice of appearance,” and it should have sought legal advice sooner to address its contention that “it did not understand the implications” of the served complaint.
The case and appeal were heard in New Orleans, where all federal cases involving Chinese drywall have been consolidated.