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From Products Liability Law Daily, March 1, 2017

Innocent seller provision blocks homeowners’ Chinese-made drywall claims

By Susan Lasser, J.D.

The "innocent seller" provision of the Mississippi Products Liability Act (MPLA) barred claims by homeowners against a building materials supplier that had sold defective Chinese drywall used in the construction of the homeowners’ home, a Mississippi appellate court held, affirming a lower court ruling. The trial court had correctly concluded that, as a matter of law, the supplier was an "innocent seller" within the meaning of the MPLA (Holifield v. City Salvage, Inc., February 28, 2017, Wilson, J.).

In 2006, over half of a large cargo of Chinese drywall was damaged at sea while travelling from China to Florida. The drywall manufacturer’s insurer sold a part of the drywall to a company, which then resold a part of the purchase to third-party defendant, Gulf Coast Shelter Inc. Between 2006 and 2008, Gulf Coast resold some of the drywall to City Salvage Inc. (City or the supplier), a building materials supplier. City resold some of the drywall to another defendant, Ronny Hill Construction Inc., a contractor that used some of the drywall in a home it built for the homeowners in this case.

In 2011, the homeowners discovered that the drywall in their home was made in China. They alleged that their drywall exhibited the commonly known defects in Chinese-manufactured drywall during the relevant period—i.e., it contained elevated levels of sulfur and other substances, which resulted in the emission of smelly gasses that corroded copper piping and wiring and could cause serious health problems. The homeowners filed a complaint asserting a number of claims against the contractor, City, and others. In its third-party complaint against Gulf Coast, City alleged that it had no knowledge of the alleged defects in the drywall and that it was entitled to indemnification from Gulf Coast for any liability to the homeowners. City later moved for summary judgment, arguing that it was immune from liability as an "innocent seller" under the MPLA. The trial court agreed and granted summary judgment. The homeowners appealed.

Innocent seller exemption. The MPLA’s "innocent seller" provision provides that in any action concerning an allegedly defective product, the product seller, other than the manufacturer, is not liable unless: (1) the seller "exercised substantial control over that aspect of the design, testing, manufacture, packaging or labeling of the product that caused the harm for which recovery of damages is sought; or [(2)] the seller … altered or modified the product, and the alteration or modification was a substantial factor in causing the harm for which recovery of damages is sought; or [(3)] the seller … had actual or constructive knowledge of the defective condition of the product at the time he supplied the product."

Arguments. City submitted an affidavit from its president and owner stating that it had no knowledge of the dangerous and defective properties of drywall manufactured in China when it sold the drywall at issue to the contractor that built the homeowners’ home. Moreover, at the hearing on City’s summary judgment motion, the homeowners clearly and expressly disavowed any allegation that the supplier knew or should have known of the defective properties of the Chinese drywall related to its chemical composition. As such, the homeowners, conceded that the supplier did not have actual or constructive knowledge of the defects alleged in their complaint. However, on appeal, they directly contradicted this concession and argued that there was a "significant possibility" that the supplier had actual or constructive knowledge of the defects in the drywall. The appellate court noted, though, that the homeowners waived the argument by their clear concession in the lower court. Nonetheless, the homeowners maintained that the supplier was not an innocent seller because, allegedly, it knowingly sold "salvaged" or "damaged" drywall as "new."

Ruling. The court of appeals determined that the homeowners’ allegation failed to bring their cause of action within any of the three exceptions to the MPLA’s innocent seller provision. Even if it could be assumed that the supplier had made some representation regarding the drywall that could be characterized as "packaging or labeling … the product," its alleged "packaging or labeling" of the drywall as "new" was not an "aspect of the … packaging or labeling of the product" that caused the alleged harm. The drywall was defective because of its chemical makeup, and the homeowners were seeking to recover damages for alleged corrosion of piping and wiring in their home and harm to their health. The alleged "packaging or labeling" of the drywall as "new" had nothing to do with its defective properties or the alleged harm to the homeowners, the court said.

In addition, even if the alleged sale of the drywall as "new" had amounted to an "alteration or modification" of the product, the alleged alteration/modification was not "a substantial factor in causing the harm for which recovery of damages is sought." The harms alleged by the homeowners and the damages they sought to recover were related to the original, as-manufactured chemical composition of all Chinese drywall, not any damage that may have occurred during the shipping of the particular drywall installed in their home.

Finally, the supplier’s knowledge that the drywall was salvaged was not the same as "knowledge of the defective condition of the product." The homeowners did not claim, nor was there evidence, that the drywall was defective because it was salvaged. Rather, the defective condition was the drywall’s original chemical makeup; and the homeowners admitted in court that there was no evidence that the supplier knew or should have known of that defect. Therefore, the Mississippi Court of Appeals agreed with the trial court that the supplier was entitled to summary judgment because the innocent seller provision applied as a matter of law.

Implied warranty claim. The homeowners also argued that the MPLA’s innocent seller provision did not apply to their implied warranty claims. When they filed their complaint, the MPLA applied "in any action for damages caused by a product except for commercial damage to the product itself." However, the state legislature subsequently amended the provision to clarify the MPLA’s scope. As amended, the MPLA applies "in any action for damages caused by a product, including, but not limited to, any action based on a theory of strict liability in tort, negligence or breach of implied warranty." The amendment was effective July 1, 2014, after the homeowners filed their complaint. Thus, they argued that the amendment did not apply to their case and noted that the Mississippi Supreme Court previously held that the MPLA "does not abrogate a statutory cause of action for breach of implied warranty as grounds for recovery."

The appellate court found the argument without merit. Although at the time of the accrual of their claim and the filing of their complaint, the MPLA did not completely "abrogate" a claim for breach of implied warranty, the court determined that the provisions of the MPLA—including the innocent seller provision—broadly applied "in any action for damages caused by a product except for commercial damage to the product itself." Therefore, an implied warranty claim such as the homeowners’ was subject to the innocent seller provision. Further, to allow the homeowners to circumvent the provision by relabeling a products liability claim as a warranty claim would "render[] the innocent seller provision of the MPLA an exercise in futility and irrelevancy." The court doubted that the legislature’s intent was to provide the protection of the innocent seller provision in all areas of products liability law except for that of implied warranties. Thus, the court held that the innocent seller provision also barred the homeowners’ implied warranty claim.

The case is No. 2015-CA-01293-COA.

Attorneys: Stephen W. Mullins (Luckey & Mullins, PLLC) for Kent Holifield. Edward C. Taylor (Daniel Coker Horton & Bell, PA) for City Salvage, Inc.

Companies: City Salvage, Inc.

MainStory: TopStory DefensesLiabilityNews SCLIssuesNews BuildingConstructionNews MississippiNews

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