"Blueboard" is very thin veneer plaster on gypsum wallboard that has an absorbent facing but no treatment for moisture resistance other than a harder more durable finish over the entire wall. Blueboard is not available in many areas of the US but where it is available it should be the standard choice in all rooms of the house. The concept of a house needing to "breathe" is often misinterpreted. It means a that any moisture in an exterior wall should be able to move to the dryer outside air in a cold climate and to the dryer inside air in a hot climate. The air quality of the interior spaces should be addressed with exhaust fans and heat recovery air exchangers and/or by opening a window not by moisture or air moving through the exterior wall. In a cold climate, moisture inside the house needs to be prevented from passing into a conventionally insulated exterior wall by a vapor barrier in order to prevent it from condensing and freezing on the inside face of the cold exterior sheathing. I can't imagine why two layers of drywall would be recommended unless it was to reduce the penetration of noise from outside through an exterior wall that contained no windows.

By on top, i mean in front. The cavities between the studs seem to have a 1/2" thick drywall piece fitted in the voids between them- we are renovating a downstairs bathroom and this seems to be the case too- maybe this was draft protection in case anything got in through the shingle siding, and then the cedar interlocking planks- anyway, the original pipes downstairs never had a problem on the exterior wall either it seems, although they did have the added crappy 1950s faced batt as well. Not sure if all the batt can be removed from below, insulation contractor thinks its possible- but i'm thinking it will not be successful.

Thank you Daisy and Cleo. I tried to google “forced to bring insulation up to code” and nothing shows up. I can’t find one person on a forum that says that the building department forced them to tear down wall and insulate. I would think if this would have happened to someone, she/he would have posted somewhere... I read a lot of stories about people going broke to meet requirements from the town but not from insulation. I think the only way to know for sure is to call the building department. A lot of people told me to say as little as possible to inspectors in general but I know the one from my town is highly respected as someone that is fair, reasonable and very helpful. I am the only French person living in the town so even on the phone my identity is pretty obvious right away because of my accent. I will definitely keep you posted. Thank you again for sharing your knowledge and for the support.

Okay, that's helpfuI. I think you've got a domino-effect problem. First, you've got moisture being introduced into the basement through masonry walls, potentially through capillary action from the footing, and likely through moist air entering due to leakage at the rim joist as well. Moist air is less dense than dry air and will accumulate at the highest level--which would be the volume in which the duct work is installed (it will migrate to the upper floors through openings in the floor, too.) Holes in the drywall provide a nice, easy path for moist air to reach the ductwork. Since the ductwork is uninsulated, its surface temperature is clearly at or below the dewpoint, and you're getting condensation as proof. Mike_Home has taken the time to look up the dewpoint for the conditions you stated. My guess is that the surface temperature of the ductwork in air conditioning mode would be in the neighborhood of 50 F so there you go. You can either insulate the ductwork to prevent humid air contacting the cold surface (the Armacell suggested by Worthy is a really great choice) or you can control the moisture content of the air to keep the dewpoint lower (with an appropriate margin of safety) than the surface temperature of the duct. That would involve some combination of air sealing, foundation waterproofing, and drainage to include managing storm water and directing it away from your foundation and dehumidification. Depending on the particulars of your air conditioning system, you may also be able to alter the fan speed to increase the air temperature leaving the coil. I don't know what warranty your builder offers, but if they delivered the home with the finished basement, you should consider submitting a warranty claim during your first year. They really need to be engaged in fixing the problem and learning from it so others don't have the same experience. ETA: Mike_Home, I was typing--and multitasking--when you posted. I think you're spot on.