Suntrust Mortgage, Inc. v. United Guaranty Residential Insurance Company of North Carolina

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1956
SUNTRUST MORTGAGE, INC.,
Plaintiff – Appellee,
v.
UNITED GUARANTY RESIDENTIAL INSURANCE COMPANY OF NORTH
CAROLINA,
Defendant – Appellant,
and
AIG UNITED GUARANTY CORPORATION, a/k/a United Guaranty
Corporation; JOHN DOES 1-10,
Defendants.
No. 11-2086
SUNTRUST MORTGAGE, INC.,
Plaintiff – Appellee,
v.
UNITED GUARANTY RESIDENTIAL INSURANCE COMPANY OF NORTH
CAROLINA,
Defendant – Appellant,
and

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AIG UNITED GUARANTY CORPORATION, a/k/a United Guaranty
Corporation; JOHN DOES 1-10,
Defendants.
Appeals from the United States District Court for the Eastern
District of Virginia, at Richmond. Robert E. Payne, Senior
District Judge. (3:09-cv-00529-REP)
Argued: October 24, 2012 Decided: February 1, 2013
Before WYNN and THACKER, Circuit Judges, and James K. BREDAR,
United States District Judge for the District of Maryland,
sitting by designation.
Affirmed in part and vacated in part by unpublished opinion.
Judge Wynn wrote the opinion, in which Judge Thacker joined.
Judge Bredar wrote a separate opinion concurring in part and
dissenting in part.
ARGUED: Theodore B. Olson, GIBSON, DUNN & CRUTCHER, LLP,
Washington, D.C., for Appellant. Raymond A. Cardozo, REED SMITH
LLP, San Francisco, California, for Appellee. ON BRIEF: William
E. Wegner, Christopher Dusseault, Matthew A. Hoffman, Melissa
Case, GIBSON, DUNN & CRUTCHER, LLP, Los Angeles, California;
Thomas H. Dupree, Jr., Erik R. Zimmerman, GIBSON, DUNN &
CRUTCHER, LLP, Washington, D.C.; Wyatt B. Durrette, Jr., J.
Buckley Warden IV, DURRETTECRUMP PLC, Richmond, Virginia, for
Appellant. S. Miles Dumville, Curtis G. Manchester, REED SMITH
LLP, Richmond, Virginia; Tillman J. Breckenridge, REED SMITH
LLP, Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.

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WYNN, Circuit Judge:
In this insurance contract case, Defendant United Guaranty
Residential Insurance Company of North Carolina (“United
Guaranty”) argues that the district court erred in granting
summary judgment in favor of Plaintiff SunTrust Mortgage, Inc.
(“SunTrust Mortgage”) on its breach of contract claim, denying
United Guaranty’s counterclaim based on SunTrust Mortgage’s
first material breach defense, awarding damages to SunTrust
Mortgage, and making certain sanctions and evidentiary rulings.
For the reasons discussed below, we affirm the district court’s
breach of contract and sanctions and evidentiary rulings and
vacate as to the district court’s first material breach
determination.
I.
SunTrust Mortgage makes mortgage loans on real property.
At the heart of this dispute are “IOF Combo 100 Loans,” certain
second lien loans with an interest-only option.
In 1998, SunTrust Mortgage and United Guaranty entered into
an insurance contract, the “Master Policy,” insuring SunTrust
Mortgage against payment defaults on certain loan products. It
is undisputed that United Guaranty authored the Master Policy.
Master Policy Section 4, titled “Exclusions from Coverage,”
states that United Guaranty “shall not be liable for, and this

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Policy shall not apply to” certain listed exclusions. J.A. 237.
One such exclusion, in Section 4.14, is “Failure to Conform to
Reporting Program Guidelines.” J.A. 238. It provides that
“[a]ny Claim [is excluded from coverage] if the Loan did not
meet the Reporting Program Guidelines . . . .” Id. The term
“Reporting Program Guidelines” is defined in Section 1.36 as
“the guidelines designated as such in the Reporting Program
Manual.” J.A. 232. The term “Reporting Program Manual,” as
defined in Section 1.37, “means the document designated as such
by [United Guaranty] in effect as of the date of this [Master
Policy], as it may be amended and restated by [United Guaranty]
from time to time, which contains the Reporting Program
Guidelines and which sets forth the terms and conditions under
which the Insured is to report or apply for coverage under this
Policy.” Id. When the Master Policy was executed in 1998,
there existed a document titled “Reporting Program Manual.”
That document did not, however, provide underwriting guidelines
for the loans at issue here, which were developed after the
Master Policy had been executed.
In June 2004 and October 2005, the parties executed
amendments to the Master Policy. Those amendments, the “Flow
Plans,” specified, among other things, guidelines that SunTrust
Mortgage was to use in underwriting its loans. United Guaranty
drafted nearly all the provisions in the Flow Plans, including,

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crucially, an “Underwriting Guidelines” provision stating that
“loans will conform to SunTrust Mortgage guidelines that are
currently being used and have been mutually agreed upon.” J.A.
252. That provision, identical in both the 2004 and 2005 Flow
Plans, makes no reference to e-mail correspondence, a Guideline
Matrix, or any other documents beyond the “SunTrust Mortgage
guidelines that are currently being used and have been mutually
agreed upon.” Id.
In 2005, United Guaranty created a spreadsheet containing,
in summary form, information about the insured loans. That
document, called the “Guideline Matrix,” stated, under the
heading for the IOF Combo 100 Loans at issue here, “Yes, if DU
approved.” J.A. 634. The abbreviation “DU” stands for “Desktop
Underwriter,” an automated underwriting method. According to
United Guaranty, the Guideline Matrix memorialized the “SunTrust
Mortgage guidelines that are currently being used and have been
mutually agreed upon.” J.A. 252.
By contrast, SunTrust Mortgage contends that the “SunTrust
Mortgage guidelines that are currently being used and have been
mutually agreed upon” for the loans at issue were those set
forth in an over-100-page document created by SunTrust Mortgage.
That document indicated, among other things, that IOF Combo 100
Loans “MUST be traditionally underwritten[.]” J.A. 966, 1067.

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In 2007, United Guaranty began denying SunTrust Mortgage
claims on IOF Combo 100 Loans that had been underwritten without
using Desktop Underwriter. Also in 2007, United Guaranty
informed SunTrust Mortgage that certain IOF Combo 100 Loans that
had not been underwritten through Desktop Underwriter were
“ineligible for continued coverage . . . .” J.A. 674.
SunTrust Mortgage, in turn, claimed that United Guaranty
denied and rescinded coverage without a legitimate basis in the
Master Policy or Flow Plans. Accordingly, in 2009, SunTrust
Mortgage filed this action against United Guaranty. United
Guaranty counterclaimed.
Thereafter, United Guaranty discovered that an e-mail cited
in SunTrust Mortgage’s first amended complaint differed in
substance from a version of the same e-mail in United Guaranty’s
possession. After a forensic examination showed that the cited
e-mail had been altered, United Guaranty moved for emergency
relief, and the district court ordered additional discovery into
the matter. The district court also permitted SunTrust Mortgage
to file a second amended complaint omitting the reference to the
suspect e-mail.
In May 2010, after the district court dismissed its fraud
claims in its second amended complaint, SunTrust Mortgage filed
its third amended complaint—the operative complaint for purposes
of this appeal—alleging two causes of action for breach of

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contract. United Guaranty counterclaimed, seeking declaratory
judgments regarding the loans at issue and SunTrust Mortgage’s
obligation to continue making premium payments.
In August 2010, United Guaranty moved for sanctions against
SunTrust Mortgage relating to the adulterated e-mail scheme.
The district court held a three-day evidentiary hearing on the
sanctions motion and found that SunTrust Mortgage’s former
employee Mary Pettitt deliberately altered e-mails to
manufacture documentary support for her view that the Guideline
Matrix was an internal United Guaranty tracking document not
binding on SunTrust Mortgage. The district court ordered
SunTrust Mortgage to pay United Guaranty’s fees and costs
associated with the sanctions motion. Notwithstanding its
ruling regarding the e-mail adulteration, the district court
excluded evidence regarding the SunTrust Mortgage e-mail fraud,
as well as parol evidence regarding the Guideline Matrix.
Thereafter, the district court granted summary judgment in
SunTrust Mortgage’s favor on its first breach of contract claim.
As for United Guaranty’s declaratory judgment counterclaims, the
district court initially granted, but then revoked, summary
judgment in United Guaranty’s favor. To determine whether
United Guaranty’s failure to pay claims under the Master Policy
constituted a first material breach excusing SunTrust Mortgage
from paying premiums going forward, the district court conducted

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a bench trial. The district court then ruled in SunTrust
Mortgage’s favor, concluding, among other things, that United
Guaranty’s breach of contract and breach of the implied covenant
of good faith and fair dealing—for collecting premiums on loans
it disputed were covered—constituted, in combination, a first
material breach entitling SunTrust Mortgage to cease premium
payments under the policy.
Finally, the district court held a bench trial on damages,
after which it awarded SunTrust Mortgage over forty million
dollars. With this appeal, United Guaranty challenges the
district court’s various rulings.
II.
With its first argument, United Guaranty contends that the
district court erred in granting SunTrust Mortgage summary
judgment on its breach of contract claim. Specifically, United
Guaranty argues that the district court erred in excluding the
Guideline Matrix and related evidence as parol evidence and that
a reasonable jury, with that evidence before it, could determine
that the Guideline Matrix established the terms of coverage. We
review the district court’s summary judgment decision de novo.
In re Peanut Crop Ins. Litig., 524 F.3d 458, 470 (4th Cir.
2008). Upon doing so, we conclude that the district court did

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not err, and that SunTrust Mortgage was entitled to summary
judgment.
This contract dispute is before us on diversity
jurisdiction; undisputedly, Virginia law applies. The parol
evidence rule, at the heart of United Guaranty’s argument, “has
nowhere been more strictly adhered to in its integrity than in
Virginia.” Erlich v. Hendrick Const. Co., Inc., 217 Va. 108,
112, 225 S.E.2d 665, 668 (1976) (quotation marks omitted).1
Under Virginia law, the rule provides that “where an agreement
is complete on its face, is plain and unambiguous in its terms,
the court is not at liberty to search for its meaning beyond the
instrument itself.” Globe Iron Const. Co. v. First Nat’l Bank
of Boston, 205 Va. 841, 848, 140 S.E.2d 629, 633 (1965).
In effect, the rule recognizes that “where parties have
reduced their contract to a writing which imposes a legal
obligation in clear and explicit terms the writing shall be the
sole memorial of that contract . . . .” Pulaski Nat’l Bank v.
1 While called an “evidence” rule, “[t]he view that the
parol evidence rule is substantive rather than procedural has
received such widespread recognition that it may be said to be
universally accepted.” 11 Williston on Contracts § 33:4 (4th
ed. 2012). Accordingly, because it is a substantive rule, we
look to the pertinent state law to resolve United Guaranty’s
parol evidence challenge. See Erie R.R. Co. v. Tompkins, 304
U.S. 64, 78 (1938).

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Harrell, 203 Va. 227, 233, 123 S.E.2d 382, 387 (1962). It
therefore logically follows that “when the language in an
insurance policy is clear and unambiguous, courts . . . give the
language its plain and ordinary meaning and enforce the policy
as written.” P’ship Umbrella, Inc. v. Fed. Ins. Co., 260 Va.
123, 133, 530 S.E.2d 154, 160 (2000). And thus, “[h]owever
inartfully it may have been drawn, the court cannot make a new
contract for the parties, but must construe its language as
written.” Berry v. Klinger, 225 Va. 201, 208, 300 S.E.2d 792,
796 (1983).
Further, Virginia law dictates that ambiguities in
insurance contracts be construed against insurers and in favor
of insureds and coverage. Indeed,
[a]s we have recognized, the courts of Virginia
consistently apply two rules in construing the
language of insurance policies. “First, where language
in an insurance policy is susceptible of two
constructions, it is to be construed liberally in
favor of the insured and strictly against the insurer
. . . . Second, where two interpretations equally fair
may be made, the one which permits a greater indemnity
will prevail.” Jefferson-Pilot Fire & Casualty Co. v.
Boothe, Prichard & Dudley, 638 F.2d 670, 674 (4th Cir.
1980) (citing Fidelity & Casualty Co. v.
Fratarcangelo, 201 Va. 672, 112 S.E.2d 892 (1960);
Ayers v. Harleysville Mutual Casualty Co., 172 Va.
383, 2 S.E.2d 303 (1939)). “Where an insurance policy
is susceptible of two constructions, one of which
would effectuate coverage and the other not, it is the
court’s duty to adopt that construction which will
effectuate coverage.” Mollenauer v. Nationwide Mutual
Insurance Co., 214 Va. 131, 198 S.E.2d 591, 592 (1973)
(per curiam). Accord White v. Blue Cross, 215 Va.
601, 212 S.E.2d 64, 65 (1975) (per curiam).

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Joseph P. Bornstein, Ltd. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 828 F.2d 242, 245 (4th Cir. 1987).
The threshold question before us is whether the Master
Policy is unambiguous as a matter of law. If yes, it must be
enforced as written. SunTrust Mortgage argues that the Flow
Plans unambiguously identify the “SunTrust Mortgage guidelines”—
and not the Guideline Matrix—as setting forth the applicable
underwriting guidelines for the IOF Combo 100 loans. By
contrast, United Guaranty argues that under the Master Policy
and Flow Plans, the Guideline Matrix and related e-mail
communications establish the applicable underwriting guidelines.
The parties executed the Flow Plans after the Master
Policy. The Flow Plans thus represent the parties’ final
expression of their intent. The Flow Plans clearly delineate
that “SunTrust Mortgage guidelines” set forth the governing
underwriting guidelines for the IOF Combo 100 loans. We agree
with SunTrust Mortgage that the Flow Plans simply do not reflect
an understanding that United Guaranty guidelines provide the
operative underwriting requirements. Instead, the Flow Plans
plainly state that SunTrust Mortgage’s guidelines govern, and
those guidelines do not mandate the use of Desktop Underwriter
for coverage.

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United Guaranty nevertheless contends that the phrase
“SunTust Mortgage guidelines” refers not to a SunTrust Mortgage
document but instead to United Guaranty’s guidelines that it
used specifically for SunTrust Mortgage, as opposed to
guidelines that United Guaranty used for its other
policyholders. Although the parties reasonably could have been
expected to designate underwriting guidelines furnished by the
insurer, the Flow Plans’ language reflects no such
understanding.
As the district court noted, the Master Policy, prior to
its amendment by the Flow Plans, originally indicated that “the
Reporting Program Manual, and, by extension, the Reporting
Program Guidelines housed therein, is a U[nited] G[uaranty]
document—a document designated by U[nited] G[uaranty, and
U[nited] G[uaranty] alone, that sets forth underwriting
guidelines that [SunTrust Mortgage] is to follow.” J.A. 1080.
But the Flow Plans amended the Master Policy. And the Flow
Plans make plain that SunTrust Mortgage guidelines, and not
United Guaranty guidelines, control.
Moreover, even if we believed there to exist a conflict
between the Master Policy and the Master Policy as amended by
the Flow Plans, we would be obligated, under Virginia law, to
read any resulting ambiguity in favor of the insured, i.e.,
SunTrust Mortgage, and coverage. See, e.g., Jefferson-Pilot

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Fire & Cas., 638 F.2d at 674 (“[W]here language in an insurance
policy is susceptible of two constructions, it is to be
construed liberally in favor of the insured and strictly against
the insurer.”); Joseph P. Bornstein, Ltd., 828 F.2d at 245
(“Where an insurance policy is susceptible of two constructions,
one of which would effectuate coverage and the other not, it is
the court’s duty to adopt that construction which will
effectuate coverage.” (quotation marks omitted)). We therefore
would read the Master Policy and Flow Plans in SunTrust
Mortgage’s favor.
United Guaranty nevertheless urges us to consider evidence
outside the four corners of the Master Policy, arguing that it
is not a fully integrated contract. United Guaranty contends
that outside evidence is necessary to understand the partially
integrated policy’s terms.
Under Virginia law, the partial integration doctrine
“allows parties to a contract to supplement the terms of the
writing with extrinsic evidence only if: (1) the parties did not
reduce their entire agreement to writing; (2) the extrinsic
evidence does not contradict or vary the written terms; and (3)
the extrinsic evidence involves items on which the parties
agreed contemporaneously with the writing.” Swengler v. ITT
Corp. Electro-Optical Prods. Div., 993 F.2d 1063, 1069 (4th Cir.

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1993) (emphasis added). On the facts before us, United Guaranty
simply cannot jump those hurdles.
At a minimum, we cannot agree that the Master Policy leaves
unspecified the governing underwriting guidelines. To the
contrary, the Flow Plans, which amended the Master Policy, made
quite clear that the SunTrust Mortgage guidelines then in place,
and to which the parties had mutually agreed, controlled the
underwriting requirements. It is undisputed that SunTrust
Mortgage had its own guidelines in place, and those guidelines
indicated that the loans “MUST be traditionally underwritten[.]”
J.A. 966, 1067. At least as to the underwriting guidelines,
therefore, the parties had indeed reduced them to writing. And
because United Guaranty cannot satisfy even the first of the
three elements necessary to admit evidence under the partial
integration doctrine, United Guaranty’s argument fails.
United Guaranty also suggests that the public policy behind
Virginia’s rule of reading ambiguities in insurance contracts
against insurers and in favor of insureds makes little sense in
the commercial context. Yet United Guaranty cites not a single
Virginia case stating as much. And this Court has repeatedly
applied the rule in commercial cases. See, e.g., Highway Exp.
Inc. v. Fed. Ins. Co., 19 F.3d 1429 (4th Cir. 1994) (unpublished
table case applying rule in commercial insurance context);
Joseph P. Bornstein, Ltd., 828 F.2d 242 (applying rule to

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commercial insurance case); Jefferson-Pilot Fire & Cas., 638
F.2d 670 (same). United Guaranty provides us with no support
for changing course here.
United Guaranty further argues that summary judgment was
inappropriate based on a single footnote in a thirty-year-old
case, Gen. Accident Fire & Life Assurance Corp., Ltd. v. Akzona,
Inc., 622 F.2d 90, 93 n.5 (4th Cir. 1980). In Akzona, this
Court determined that the insurance policy at issue was
ambiguous and stated, in the pertinent footnote, that summary
judgment was inappropriate due to material factual disputes.
Notably, one such dispute preventing summary judgment was the
authorship of the policy at issue. Id.
By contrast, here, no material factual disputes hindered
the district court at summary judgment, and the Master Policy’s
and Flow Plans’ authorship was clear—United Guaranty drafted
them. “[S]tate and federal courts in Virginia have often
resolved any ambiguity by strictly construing or interpreting
the unclear provisions against the party who drafted the
agreement. . . . This cannon of construction is especially true
in the context of insurance policies.” John V. Little, Contract
Law in Virginia, Vol. 1 at 90-91 (Virginia CLE Pubs. 2011)
(citing, e.g., Gov’t Employees Ins. Co. v. Moore, 266 Va. 155,
165, 580 S.E.2d 823, 828 (2003) (observing that Virginia courts
have consistently construed policies against insurers because

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they “‘are contracts whose language is ordinarily selected by
insurers rather than policyholders’”)). United Guaranty’s
reliance on Akzona is therefore misplaced.
Finally, even assuming for the sake of argument that,
somehow, the Guideline Matrix and related evidence could be
considered, they would be of little help to United Guaranty’s
cause. The Guideline Matrix states for “Eligible 1st Mortgage
Programs” that are “Interest Only” “Yes, if DU approved.” J.A.
634. Nothing is defined or explained in the minimalist matrix.
And the e-mails that United Guaranty sought to put before a jury
indicate that the Guideline Matrix was, for example,
“operational” (J.A. 835) and contained “grids of what [United
Guaranty] will insure” (J.A. 838). They further indicate that
United Guaranty sought to “confirm that data we have here” were
“accura[te].” Id. Reading the terse Guideline Matrix provision
and pertinent e-mails in favor of the insured and coverage, as
we must, we cannot conclude that they unambiguously demonstrate
the parties’ intent that the Guideline Matrix, and not the
SunTrust Mortgage guidelines, govern—and only under that
circumstance would the Master Policy as amended by the Flow
Plans be read in United Guaranty’s favor.
In sum, it may be that United Guaranty intended that the
Guideline Matrix set forth the requirements for coverage. But
United Guaranty, which undisputedly authored the operative

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provisions, did not draft the Master Policy as amended by the
Flow Plans to clearly reflect that. Under Virginia law, United
Guaranty is stuck with the provisions it drafted, and summary
judgment for SunTrust Mortgage on its breach of contract claim
was proper.
III.
United Guaranty next argues that the district court erred
in granting judgment in favor of SunTrust Mortgage on United
Guaranty’s declaratory judgment counterclaim regarding SunTrust
Mortgage’s obligation to pay renewal premiums. We review a
judgment following a bench trial, such as this one, under a
mixed standard of review: Factual findings may be reversed only
for clear error, while conclusions of law are examined de novo.
Roanoke Cement Co., L.L.C. v. Falk Corp., 413 F.3d 431, 433 (4th
Cir. 2005).
Here, the district court convened a bench trial to
determine whether United Guaranty had committed a first material
breach and whether SunTrust Mortgage was entitled to attorney’s
fees under Virginia Code § 38.2-209(A). Section 38.2-209(A)
allows for attorney’s fees but states that “attorney’s fees
shall not be awarded unless the court determines that the
insurer, not acting in good faith, has either denied coverage or
failed or refused to make payment to the insured under the

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policy.” Id. The parties settled the fee issue before trial.
Indeed, SunTrust Mortgage’s counsel represented in open court
that settling the fee issue would allow United Guaranty to
“escape the possibility of a finding of bad faith,” saving it “a
huge amount of money and the possibility of stigma.” J.A. 1127.
The bench trial was, therefore, solely about the first material
breach issue.
SunTrust Mortgage raised, in its answer to the counterclaim
and elsewhere, its “first material breach” affirmative defense.
But it did not raise, as an affirmative defense or otherwise, a
breach of the implied covenant of good faith and fair dealing.
Notably, the district court pointed out that SunTrust Mortgage
“did not employ the precise phrase ‘breach of an implied
covenant of good faith and fair dealing’” in its briefing either
before or after the bench trial on the counterclaim until
prompted to do so by court order. J.A. 1418, 1488. And
SunTrust Mortgage conceded that it “did not use the words
‘implied duty of good faith’” in its brief setting forth the
basis for its first material breach defense. Appellee’s Br. at
53.
The district court declared that United Guaranty had,
nevertheless, “not shown that it was prejudiced by [SunTrust
Mortgage’s] arguing after trial, for the first time explicitly,
that [United Guaranty] breached an implied covenant of good

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faith and fair dealing in continuing to collect premiums on
performing IOF Combo 100 Loans.” J.A. 1489. The district court
determined that United Guaranty breached its implied covenant of
good faith and fair dealing vis-à-vis SunTrust Mortgage by
collecting premiums under the Master Policy without intending to
pay claims. The district court relied on its good faith and
fair dealing determination to hold that the cumulative effect of
United Guaranty’s breaches constituted a material breach of the
policy. Specifically, the district court stated that United
Guaranty’s “breaches, considered in combination, constituted a
material breach of the insurance policy.” J.A. 1515.
It is axiomatic that a “party must affirmatively state any
avoidance or affirmative defense . . . .” Fed. R. Civ. P. 8.
Further, “it is a frequently stated proposition of virtually
universal acceptance by the federal courts that a failure to
plead an affirmative defense as required by Federal Rule 8(c)
results in the waiver of that defense and its exclusion from the
case . . . .” 5 Fed. Prac. & Proc. Civ. § 1278 (3d ed. 2012).
See also, e.g., S. Wallace Edwards & Sons, Inc. v. Cincinnati
Ins. Co., 353 F.3d 367 (4th Cir. 2003) (holding insurer waived
affirmative defense of insurance policy’s two-year limitations
period for filing suit by failing to raise issue until summary
judgment stage and noting that the delayed assertion of the
defense prejudiced the opposing party); Sales v. Grant, 224 F.3d

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293, 296 (4th Cir. 2000) (holding that this Court had “no
trouble” deeming affirmative defense waived because “mention of
qualified immunity in [the defendants’] answers consisted of
only a single, cursory sentence on the matter, contained in a
listing of several affirmative defenses: ‘The individual
defendants are protected by qualified immunity from suit’” and
because defendants failed to pursue affirmative defense in
motions and at trial).
The district court deemed good faith and fair dealing an
affirmative defense. J.A. 1504 (discussing the “affirmative
defense brought by the insured in its capacity as a defendant
that, by failing to perform the policy consonant with the duty
of good faith and fair dealing, the insurer has materially
breached the policy and therefore may not pursue its own claim
(in this instance for declaratory relief) under the policy”).
Even SunTrust Mortgage conceded at oral argument that good faith
and fair dealing is an affirmative defense. And, “[a]ffirmative
defenses that raise new facts and arguments, which [], if
proven, would defeat the plaintiff’s claim and thus are true
affirmative defenses[,] include mitigation of damages, failure
of plaintiff to fulfill conditions precedent, breach of covenant
of good faith and fair dealing, and waiver.” Def. Against a
Prima Facie Case § 2:1 (rev. ed. 2012) (emphasis added).

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Nevertheless, the district court made plain that the
implied covenant of good faith and fair dealing was not raised
until after trial—long after an affirmative defense must be
raised. SunTrust Mortgage has therefore waived the good faith
and fair dealing issue, and the district court erred in
considering it. Further, “[t]he prejudice to United Guaranty—
deciding a $92 million claim based on a theory that was raised
for the first time by the court months after trial—is obvious.”
Appellant’s Br. at 49. United Guaranty states, for example,
that it would have called numerous additional witnesses at trial
and adduced substantial additional testimony in its favor, had
it known that good faith and fair dealing was at issue. The
district court itself acknowledged as much when, in discussions
regarding the settlement of the bad faith attorney’s fees issue,
the district court noted that “removing the bad faith portion of
the two-step trial” would “eliminate a lot of witnesses . . . .”
J.A. 1169-70.
Not only did SunTrust fail, as a matter of fact, to put
United Guaranty on notice that an alleged breach of the implied
covenant of good faith and fair dealing was at issue—even
Virginia state law would not have put United Guaranty on notice.
The district court held that “the extent to which the behavior
of the party failing to perform or to offer to perform comports
with standards of good faith and fair dealing” is a factor in

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deciding the first material breach issue. J.A. 1515. The
district court cited not a single Virginia state case for that
proposition. Instead, its sole support was a district court
opinion, RW Power Partners, L.P. v. Va. Elec. & Power Co., 899
F. Supp. 1490 (E.D. Va. 1995). In RW Power Partners, the
district court cited the Restatement (Second) of Contracts §
241, which lists five factors “useful in identifying the
materiality of a breach . . . .” Id. at 1496. The last of
those five factors is good faith and fair dealing.
The district court here conceded that “the Supreme Court of
Virginia has not formally adopted Section 241 of the
Restatement” with its multi-factor test. J.A. 1514 n.63.
Nevertheless, the district court asserted that the Virginia
Supreme Court “has cited its commentary in expounding on the
type of evidence required to establish material breach,” J.A.
1514-15, citing to Horton v. Horton, 254 Va. 111, 116, 487
S.E.2d 200, 204 (1997). But the Virginia Supreme Court in
Horton cited the Restatement merely for the proposition that the
“evidence required to establish a material breach of contract
will vary depending on the facts surrounding a particular
contract.” Horton, 254 Va. at 116, 487 S.E.2d at 204. Nowhere
in Horton did the Virginia Supreme Court even mention the
implied covenant of good faith and fair, much less hold that it
should be considered as a factor in a first material breach

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analysis. And we have found no other Virginia Supreme Court
cases so holding. In other words, even the undisputedly
applicable substantive law would not have suggested to United
Guaranty that an implied covenant of good faith and fair dealing
claim inhered in SunTrust’s first material breach defense.
In sum, the record reveals that United Guaranty’s alleged
breach of the implied covenant of good faith and fair dealing
was not raised until after the district court had held its bench
trial. By that late date, the prejudice to United Guaranty was
“obvious,” and SunTrust Mortgage had waived the issue. We
therefore vacate the district court’s judgment in favor of
SunTrust Mortgage as to first material breach, which relied on
the good faith and fair dealing determination.
IV.
United Guaranty next contends that “[i]f SunTrust
[Mortgage] is excused from paying $92 million in premiums
because United Guaranty committed a first material breach, that
amount must be deducted from SunTrust [Mortgage]’s damages . . .
.” Appellant’s Br. at 63. Because we vacate the district
court’s judgment on the first material breach issue, the
district court’s damages award does not need to reflect any
premium savings, as they no longer exist. United Guaranty’s
argument is, therefore, moot.

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V.
Finally, United Guaranty argues that the district court
abused its discretion by declining to impose harsher sanctions
for SunTrust Mortgage’s misconduct relating to the fraudulent e-
mail alterations. The district court ordered SunTrust Mortgage
to pay United Guaranty’s attorney’s fees and expenses incurred
in connection with United Guaranty’s motion for sanctions, but
rejected United Guaranty’s motion to dismiss SunTrust Mortgage’s
complaint altogether. This Court reviews the appropriateness of
sanctions imposed by a district court for an abuse of
discretion. United States v. Shaffer Equip. Co., 11 F.3d 450,
462 (4th Cir. 1993).
A district court’s authority to dismiss a case based on a
party’s misconduct derives from the court’s “inherent power.”
Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). “Because
the inherent power is not regulated by Congress or the people
and is particularly subject to abuse, it must be exercised with
the greatest restraint and caution, and then only to the extent
necessary.” Shaffer, 11 F.3d at 461.
The Supreme Court has called dismissal “a particularly
severe sanction,” yet one that falls within the court’s
discretion. Chambers, 501 U.S. at 45. This Court has
recognized that dismissal may be warranted “when a party
deceives a court or abuses the process at a level that is

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25
utterly inconsistent with the orderly administration of justice
or undermines the integrity of the process.” Shaffer, 11 F.3d
at 462. In Shaffer, we identified six factors for courts to
consider in determining whether dismissal is appropriate:
(1) the degree of the wrongdoer’s culpability; (2) the
extent of the client’s blameworthiness if the wrongful
conduct is committed by claims against blameless
clients; (3) the prejudice to the judicial process and
the administration of justice; (4) the prejudice to
the victim; (5) the availability of other sanctions to
rectify the wrong by punishing culpable persons,
compensating harmed persons, and deterring similar
conduct in the future; and (6) the public interest.
Id. at 462-63. Further, we directed courts to give particular
consideration to the broader policy of deciding cases on the
merits. Id. at 463.
When a party’s sanctionable conduct is spoliation of
evidence, to justify dismissal, the district court must
“conclude either (1) that the spoliator’s conduct was so
egregious as to amount to a forfeiture of his claim, or (2) that
the effect of the spoliator’s conduct was so prejudicial that it
substantially denied the defendant the ability to defend the
claim.” Silvestri v. Gen. Motors Corp., 271 F.3d 583, 593 (4th
Cir. 2001).
Here, the district court concluded that Pettitt’s
spoliation of evidence constituted a fraud on the court for
which SunTrust Mortgage could be held responsible. The court
also held that SunTrust Mortgage’s management and in-house

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26
counsel abused the judicial process by encouraging the use of
one of Pettitt’s altered e-mails in SunTrust Mortgage’s
litigation efforts against United Guaranty.2 The court then
weighed the Shaffer factors to determine the appropriate
sanction. Though the court found that some of the factors
weighed in favor of granting dismissal, after thorough
consideration of all factors as well as the broader policies
articulated in Shaffer, the district court decided in favor of a
less severe sanction.
For at least two reasons, we are persuaded that the
district court did not abuse its discretion in rejecting United
Guaranty’s request for dismissal. First, despite its assertion
to the contrary, United Guaranty was not significantly
prejudiced beyond the attorney’s fees and additional expenses it
incurred in litigating its sanctions motion. While the district
court found that Pettitt spoliated evidence, the original,
unaltered e-mails eventually came to light and were before the
court for its merits determinations. United Guaranty was,
therefore, not “substantially denied the ability to defend the
claim.” Silvestri, 271 F.3d at 593.
2 SunTrust Mortgage’s first amended complaint referenced a
February 22, 2008 e-mail that Pettitt had altered.

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27
Second, the integrity of the judicial process was not so
greatly frustrated as to warrant the “particularly severe
sanction” of dismissal. Chambers, 501 U.S. at 45. SunTrust
Mortgage’s misconduct was certainly egregious and burdened an
already stretched court with several months of needless
litigation. However, because the unaltered e-mails were
preserved, the negative effects of SunTrust Mortgage’s bad
behavior on the judicial process were only temporary. Moreover,
because we affirm the district court’s summary judgment ruling
in favor of SunTrust Mortgage, including the district court’s
determination that parol evidence was inadmissible in this case,
the evidence affected by SunTrust Mortgage’s misconduct has no
bearing on the outcome of SunTrust Mortgage’s breach of contract
claim.3
In the alternative, United Guaranty argues that the
district court should have given an adverse-inference jury
instruction with respect to SunTrust Mortgage’s misconduct.
Specifically, United Guaranty contends that “[t]he jury should
be instructed to presume that Pettitt’s testimony would have
been favorable to United Guaranty, and to interpret SunTrust
3 The parol evidence included both Pettitt e-mails and any
testimony Pettitt would have provided with respect to the
Guideline Matrix, had she not invoked the Fifth Amendment and
refused to testify.

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28
[Mortgage]’s misconduct as indicative of the weakness of
SunTrust [Mortgage]’s case.” Appellant’s Br. at 73. However,
after the district court denied United Guaranty’s requested jury
instruction, it granted SunTrust Mortgage’s motion for summary
judgment. Because we affirm the district court’s decision to
grant summary judgment, SunTrust Mortgage’s breach of contract
claim will not be put to a jury. Therefore, any alleged error
regarding a refused jury instruction is moot.
Lastly, United Guaranty contends that the district court
should not have granted SunTrust Mortgage’s motion to exclude
evidence of the Pettit alterations from consideration by the
jury under Federal Rule of Evidence 403(b). Again, because the
breach of contract claim will not reach a jury, any alleged
error stemming from the district court’s Rule 403(b) ruling is
moot.
VI.
For the foregoing reasons, we affirm in part and vacate in
part the orders on appeal.
AFFIRMED IN PART AND VACATED IN PART

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BREDAR, District Judge, concurring in part and dissenting in
part:
I respectfully dissent in part and concur in part with the
majority’s disposition of this case.
Although both of the parties in the court below argued the
language at issue in the 2004 and 2005 Flow Plans was
unambiguous, the district court, I believe, incorrectly found as
a matter of law that a patent ambiguity existed such that it
altered the fundamental balance of power between the parties.
The district court focused on three words in the Flow Plans,
specifically, “SunTrust Mortgage guidelines,” and did not give
any weight to the equally important modifying language, “that
are currently being used and have been mutually agreed upon.”
The majority’s opinion follows a similar direction. But, as I
see it, this modifying language holds the key to proper
interpretation of the contract between SunTrust Mortgage and
United Guaranty and cannot be disregarded. As the Virginia
Supreme Court has said, “no word or clause in a contract will be
treated as meaningless if a reasonable meaning can be given to
it, and parties are presumed not to have included needless words
in the contract.” TM Delmarva Power, LLC v. NCP of Virginia,
LLC, 557 S.E.2d 199, 200 (Va. 2002).
The language in question is clear and unambiguous. It
means what it says, that is, “SunTrust Mortgage guidelines that

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30
are currently being used and have been mutually agreed upon.”
It is only after the rubber meets the road that we learn the
parties believe this language applies to different documents, or
different sets of documents. Thus, this is a classic example of
a latent ambiguity, defined by Virginia courts as a term of an
agreement or instrument “‘which, upon application to external
objects, is found to fit two or more of them equally.’” Zehler
v. E.L. Bruce Co., 160 S.E.2d 786, 789 n.5 (Va. 1968) (citing 9
Wigmore, Evidence § 2472, at 233 (3d ed. 1940)). “A latent
ambiguity exists where language ‘while appearing perfectly clear
at the time the contract[ ] [is] formed, because of subsequently
discovered or developed facts, may reasonably be interpreted in
either of two ways.’” Virginia Elec. & Power Co. v. Norfolk S.
Ry. Co., 683 S.E.2d 517, 526 (Va. 2009) (quoting Galloway Corp.
v. S.B. Ballard Constr. Co., 464 S.E.2d 349, 354 (Va. 1995)).
The contested phrase clearly implies a factual predicate,
and the predicate set forth in the Master Policy was that
underwriting guidelines would originate with United Guaranty.
But the district court relied upon a disputed factual allegation
by SunTrust Mortgage——that SunTrust Mortgage had devised its own
underwriting guidelines and that United Guaranty had agreed to
them——to decide that the parties used this language to permit
substitution of SunTrust Mortgage’s guidelines for United
Guaranty’s guidelines. Whether United Guaranty had agreed to

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31
SunTrust Mortgage’s underwriting guidelines was hotly disputed
by United Guaranty.
Procedurally, it was incorrect for the district court to
rely upon SunTrust Mortgage’s extrinsic evidence to resolve this
matter upon summary judgment. This was pled as a jury case, and
extrinsic evidence as to the meaning of the language in question
should only have been considered by the jury to determine which
guidelines fit the phrase. Virginia courts for more than two
centuries have recognized the propriety of receiving extrinsic
evidence to resolve a latent ambiguity. Gatewood v. Burrus, 7
Va. (3 Call.) 194, 1802 WL 650, at *3 (Va. 1802). And
resolution of a latent ambiguity by resort to extrinsic evidence
is a question of fact for the jury, not for the court. Ewell v.
Brock, 91 S.E. 761, 762 (Va. 1917). Alternatively, the Flow
Plans reference a collateral agreement, which is clearly a
proper subject for admission of extrinsic evidence——again, to be
considered by the jury. See J.E. Robert Co. v. J. Robert Co.,
Inc., of Virginia, 343 S.E.2d 350, 343 (Va. 1986). United
Guaranty was entitled to submit extrinsic evidence to the jury
and have it determine which document or set of documents fit the
language in the Flow Plans.
This Court has previously made it clear that the intention
of contracting parties is a question of fact that cannot be
resolved on summary judgment and that, “[i]f there is more than

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32
one permissible inference as to intent to be drawn from the
language employed, the question of the parties’ actual intention
is a triable issue of fact.” Bear Brand Hosiery Co. v. Tights,
Inc., 605 F.2d 723, 726 (4th Cir. 1979), cited in Gen. Acc. Fire
& Life Assur. Corp., Ltd. v. Akzona, Inc., 622 F.2d 90, 93 (4th
Cir. 1980). See also Cram v. Sun Ins. Office, Ltd., 375 F.2d
670, 674 (4th Cir. 1967) (“the intent of the parties to an
ambiguous contract is a question of fact which cannot properly
be resolved on motions for summary judgment”); Am. Fid. & Cas.
Co. v. London & Edinburgh Ins. Co., 354 F.2d 214, 216 (4th Cir.
1965) (“Not merely must the historic facts be free of
controversy [in summary judgment proceeding] but also there must
be no controversy as to the inferences to be drawn from them.”).
Because a genuine dispute of material fact existed on SunTrust
Mortgage’s main claim against United Guaranty, I would rule that
summary judgment for SunTrust Mortgage was improper.*
* SunTrust Mortgage has relied in its brief on case law from
Virginia that sets forth a presumption of choosing an insured’s
interpretation over an insurer’s interpretation of disputed
contractual language. (Appellee’s Br. 31.) Such a presumption
should logically be employed only if, after employing the
traditional tools of contract construction, one is still left
with two or more reasonable interpretations. To rely upon the
presumption in the first instance, without proper consideration
of extrinsic evidence, as this case shows, results in a failure
to ascertain the intentions of the contracting parties, and the
Virginia Supreme Court has indicated that determining the
parties’ intent is the whole point of interpreting contracts,
(Continued)

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33
I would also reverse the evidentiary ruling, barring the
admission of United Guaranty’s Guideline Matrix and SunTrust
Mortgage’s altered email messages on the issue of which party’s
underwriting guidelines governed. The Guideline Matrix should
have been submitted to the trier of fact as extrinsic evidence
pertaining to the underwriting guidelines. And the email
messages were highly relevant evidence that displayed guilty
knowledge by SunTrust Mortgage’s key employee that SunTrust
Mortgage’s position was contradicted by the course of dealing
between the parties. See, e.g., J.A. 696 (notes from SunTrust
Mortgage affirming Mary Pettit’s agreement to United Guaranty’s
terms bound SunTrust Mortgage). This evidence bore directly on
the question of how to resolve the latent ambiguity in the
contract. Excluding this evidence unfairly tied United
Guaranty’s hands in defending itself in this lawsuit.
Because I believe summary judgment was improperly granted
to SunTrust Mortgage on its claim against United Guaranty, I
would also hold that summary judgment was improperly granted to
SunTrust Mortgage on United Guaranty’s counterclaim for the
simple reason that the record is yet incomplete as to whether
United Guaranty breached its contract of insurance with SunTrust
including insurance contracts, Virginia Farm Bureau Mut. Ins.
Co. v. Williams, 677 S.E.2d 299, 302 (Va. 2009).

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34
Mortgage; thus, it is premature to consider whether SunTrust
Mortgage properly and timely raised the affirmative defense of
first material breach. I would not, however, disagree with the
majority’s reasoning as to the failure of SunTrust Mortgage’s
affirmative defense were the counterclaim properly before the
Court on its merits. And I would further conclude that it would
be unconscionable to require United Guaranty to continue to
provide insurance coverage on loans for which SunTrust Mortgage
is excused from paying renewal premiums.
Finally, I would affirm the ruling of the district court on
its sanctions ruling as being within the scope of discretion
afforded to district courts on such matters.
In summary, I respectfully dissent from the majority’s
affirmance of summary judgment on SunTrust Mortgage’s claim
against United Guaranty, concur with the reversal of summary
judgment against United Guaranty on its counterclaim, dissent
from the majority’s affirmance of the granted motion in limine,
and concur with the majority’s affirmance of the ruling on
sanctions.

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