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No. 11-1956
RESIDENTIAL
INSURANCE
COMPANY
OF
NORTH
Defendant Appellant,
and
AIG UNITED GUARANTY CORPORATION,
Corporation; JOHN DOES 1-10,
a/k/a
United
Guaranty
Defendants.
No. 11-2086
RESIDENTIAL
INSURANCE
Defendant Appellant,
and
COMPANY
OF
NORTH
a/k/a
United
Guaranty
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:
Decided:
February 1, 2013
Insurance
argues
that
Company
the
of
North
district
court
Carolina
(United
erred
granting
in
Guarantys
material
counterclaim
breach
based
defense,
on
awarding
SunTrust
damages
Mortgages
to
SunTrust
as
to
the
district
courts
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
J.A. 237.
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
guidelines
Manual.
designated
J.A. 232.
as
such
in
the
Reporting
Program
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.
there
Id.
existed
document
titled
Reporting
Program
Manual.
June
2004
and
October
2005,
the
parties
executed
United Guaranty
J.A.
Id.
summary
document,
form,
called
information
the
about
Guideline
the
insured
Matrix,
loans.
stated,
That
under
the
heading for the IOF Combo 100 Loans at issue here, Yes, if DU
approved.
J.A. 634.
According to
J.A. 252.
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
J.A. 674.
filed
this
action
against
United
Guaranty.
United
Guaranty counterclaimed.
Thereafter, United Guaranty discovered that an e-mail cited
in
SunTrust
Mortgages
first
amended
complaint
differed
in
this
appealalleging
two
causes
6
of
action
for
breach
of
contract.
Mortgage
relating
to
the
adulterated
scheme.
motion
employee
Mary
and
found
Pettitt
that
SunTrust
deliberately
Mortgages
altered
former
e-mails
to
on
SunTrust
Mortgage
associated
ruling
SunTrust
with
regarding
Mortgage.
to
pay
The
United
the
sanctions
the
district
Guarantys
motion.
court
fees
ordered
and
costs
Notwithstanding
adulteration,
the
district
its
court
court
judgment
in
initially
United
granted,
Guarantys
but
favor.
then
To
revoked,
summary
determine
whether
bench
trial.
The
district
court
then
ruled
in
SunTrust
breach
entitling
SunTrust
Mortgage
to
cease
premium
which
dollars.
it
With
awarded
this
SunTrust
appeal,
Mortgage
United
over
Guaranty
forty
million
challenges
the
II.
With its first argument, United Guaranty contends that the
district
court
erred
in
granting
SunTrust
Mortgage
summary
Specifically, United
We
not
err,
and
that
SunTrust
Mortgage
was
entitled
to
summary
judgment.
This
contract
jurisdiction;
dispute
undisputedly,
is
before
Virginia
law
us
on
applies.
diversity
The
parol
225
665,
668
(1976)
(quotation
marks
omitted). 1
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
writing
which
imposes
legal
Harrell, 203 Va. 227, 233, 123 S.E.2d 382, 387 (1962).
It
therefore
an
logically
follows
that
when
the
language
in
inartfully it may have been drawn, the court cannot make a new
contract
for
written.
the
parties,
but
must
construe
its
language
as
796 (1983).
Further,
Virginia
law
dictates
that
ambiguities
in
Indeed,
Joseph
P.
Bornstein,
Ltd.
v.
Natl
Union
Fire
Ins.
Co.
of
threshold
question
before
us
is
whether
the
Master
If yes, it must be
guidelines
for
the
IOF
Combo
100
loans.
By
Flow
Plans,
the
Guideline
Matrix
and
related
parties
The
executed
Flow
Plans
the
thus
SunTrust
Mortgage
Flow
Plans
represent
after
the
the
parties
Master
final
guidelines
set
forth
the
governing
We agree
with SunTrust Mortgage that the Flow Plans simply do not reflect
an
understanding
that
United
Guaranty
guidelines
provide
the
11
United
Guaranty
nevertheless
contends
that
the
phrase
specifically
guidelines
for
that
policyholders.
SunTrust
United
Mortgage,
Guaranty
used
as
opposed
for
its
to
other
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
Program
Guidelines
documenta
U[nited]
Manual,
housed
document
and,
therein,
designated
G[uaranty]
by
alone,
by
that
extension,
is
the
U[nited]
U[nited]
sets
make
plain
that
SunTrust
Mortgage
and
underwriting
Plans
G[uaranty]
G[uaranty,
forth
Reporting
J.A. 1080.
guidelines,
and
not
any
SunTrust
resulting
Mortgage,
ambiguity
and
in
coverage.
12
favor
See,
of
the
e.g.,
insured,
i.e.,
Jefferson-Pilot
is
susceptible
of
two
constructions,
it
is
to
be
insurer.);
Joseph
P.
Bornstein,
Ltd.,
828
F.2d
at
245
courts
duty
to
adopt
that
construction
which
will
We therefore
would
in
read
the
Master
Policy
and
Flow
Plans
SunTrust
Mortgages 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.
Virginia
law,
the
partial
integration
doctrine
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
Swengler v. ITT
Corp. Electro-Optical Prods. Div., 993 F.2d 1063, 1069 (4th Cir.
13
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
And
Inc. v. Fed. Ins. Co., 19 F.3d 1429 (4th Cir. 1994) (unpublished
table
Joseph
case
applying
P.
Bornstein,
rule
Ltd.,
in
commercial
828
14
F.2d
242
insurance
(applying
context);
rule
to
commercial
insurance
case);
Jefferson-Pilot
Fire
&
Cas.,
638
determined
that
the
insurance
In Akzona, this
policy
at
issue
was
was
inappropriate
due
to
material
factual
disputes.
Id.
Flow
them.
Plans
[S]tate
authorship
and
was
federal
clearUnited
courts
in
Guaranty
Virginia
drafted
have
often
unclear
provisions
against
the
party
who
drafted
the
in
Virginia,
Vol.
at
90-91
(Virginia
CLE
Pubs.
2011)
(citing, e.g., Govt Employees Ins. Co. v. Moore, 266 Va. 155,
165, 580 S.E.2d 823, 828 (2003) (observing that Virginia courts
have
consistently
construed
policies
15
against
insurers
because
rather
than
policyholders)).
United
Guarantys
the
even
assuming
Guideline
for
Matrix
the
and
sake
related
of
argument
evidence
that,
could
be
J.A.
And the e-mails that United Guaranty sought to put before a jury
indicate
that
the
Guideline
Matrix
was,
for
example,
Id.
parties
SunTrust
intent
Mortgage
circumstance
would
that
the
Guideline
guidelines,
the
Master
Matrix,
governand
Policy
as
and
only
amended
not
under
by
the
the
that
Flow
Guaranty,
which
undisputedly
16
authored
the
But
operative
III.
United Guaranty next argues that the district court erred
in granting judgment in favor of SunTrust Mortgage on United
Guarantys declaratory judgment counterclaim regarding SunTrust
Mortgages
obligation
to
pay
renewal
premiums.
We
review
the
district
court
convened
bench
trial
to
for
not
attorneys
be
awarded
fees
but
unless
states
the
Section 38.2-209(A)
that
court
attorneys
determines
that
fees
the
or
refused
to
make
payment
17
to
the
insured
under
the
policy.
Id.
settling
the
fee
issue
would
allow
United
Guaranty
to
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
or
after
do
the
prompted
to
so
SunTrust
Mortgage
by
bench
trial
court
conceded
on
the
order.
that
it
counterclaim
J.A.
did
1418,
not
use
until
1488.
And
the
words
Appellees Br. at
53.
The
district
court
declared
that
United
Guaranty
had,
[United
Guaranty]
breached
18
an
implied
covenant
of
good
faith
and
fair
dealing
in
continuing
to
collect
J.A. 1489.
premiums
on
faith
and
fair
dealing
vis--vis
SunTrust
Mortgage
by
J.A. 1515.
Fed. R. Civ. P. 8.
stage
and
noting
that
the
delayed
assertion
of
the
293,
296
(4th
Cir.
2000)
(holding
that
this
Court
had
no
immunity
in
[the
defendants]
answers
consisted
of
of
several
affirmative
defenses:
The
individual
defendants
failed
to
pursue
affirmative
defense
in
defense.
J.A.
1504
(discussing
the
affirmative
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.
defenses
that
raise
new
facts
and
And, [a]ffirmative
arguments,
which
[],
if
proven, would defeat the plaintiffs 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
20
Nevertheless,
the
district
court
made
plain
that
the
implied covenant of good faith and fair dealing was not raised
until
after
raised.
and
fair
triallong
after
an
affirmative
defense
must
be
considering it.
issue,
and
the
district
court
erred
in
The
of
good
faith
and
fair
dealing
was
at
issueeven
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
21
deciding
the
first
material
breach
issue.
J.A.
1515.
The
district court cited not a single Virginia state case for that
proposition.
opinion, RW Power Partners, L.P. v. Va. Elec. & Power Co., 899
F.
Supp.
1490
(E.D.
Va.
1995).
In
RW
Power
Partners,
the
which
lists
five
factors
useful
materiality of a breach . . . .
in
identifying
Id. at 1496.
the
The last of
has
not
Restatement
with
Nevertheless,
the
formally
its
adopted
multi-factor
district
court
Section
test.
asserted
241
J.A.
that
of
1514
the
the
n.63.
Virginia
citing
200,
204
to
Horton
(1997).
v.
Horton,
But
the
254
Virginia
Va.
111,
Supreme
116,
487
Court
in
Horton cited the Restatement merely for the proposition that the
evidence required to establish a material breach of contract
will
vary
contract.
in
Horton
depending
on
the
facts
surrounding
particular
the
Virginia
Supreme
Court
even
Nowhere
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
22
analysis.
cases
so
holding.
In
other
words,
even
the
undisputedly
obvious,
therefore
and
SunTrust
vacate
the
Mortgage
district
had
waived
courts
the
judgment
issue.
in
favor
We
of
IV.
United
[Mortgage]
Guaranty
is
excused
next
from
contends
paying
that
$92
[i]f
million
in
SunTrust
premiums
courts
judgment
district
courts
on
the
damages
first
award
material
does
not
breach
need
to
issue,
the
reflect
any
United Guarantys
V.
Finally,
United
Guaranty
argues
that
the
district
court
imposed
discretion.
by
district
court
for
an
abuse
of
Because
Supreme
sanction,
discretion.
has
called
yet
one
that
falls
U.S.
at
Chambers,
recognized
that
deceives
court
Court
501
dismissal
or
abuses
may
the
24
be
dismissal
within
45.
at
the
This
warranted
process
particularly
Court
when
a
courts
level
has
party
that
is
Shaffer, 11 F.3d
Id. at 463.
When
partys
evidence,
to
justify
conclude
either
(1)
sanctionable
conduct
dismissal,
that
the
the
is
spoliation
district
spoliators
court
conduct
was
of
must
so
Cir. 2001).
Here,
spoliation
the
of
district
evidence
court
constituted
concluded
a
fraud
that
on
the
held
that
SunTrust
Mortgages
25
management
and
Pettitts
court
for
The court
in-house
of
Pettitts
altered
e-mails
in
SunTrust
the
sanction.
weighed
Shaffer
Though
in
factors
to
court
found
the
favor
of
granting
determine
that
Mortgages
the
some
dismissal,
of
appropriate
the
after
factors
thorough
at
least
two
reasons,
we
are
persuaded
that
the
the
contrary,
United
Guaranty
was
not
significantly
found
that
Pettitt
spoliated
evidence,
the
original,
for
its
merits
determinations.
United
Guaranty
was,
26
frustrated
as
to
sanction of dismissal.
warrant
the
particularly
severe
SunTrust
stretched
litigation.
preserved,
court
However,
the
with
several
because
negative
effects
the
of
months
unaltered
SunTrust
of
needless
e-mails
Mortgages
were
bad
Moreover,
the
alternative,
court
instruction
with
should
United
have
respect
to
given
Guaranty
an
SunTrust
argues
that
adverse-inference
Mortgages
the
jury
misconduct.
27
[Mortgage]s
misconduct
as
indicative
of
the
weakness
of
However,
VI.
For the foregoing reasons, we affirm in part and vacate in
part the orders on appeal.
AFFIRMED IN PART AND VACATED IN PART
28
at
issue
in
the
2004
and
2005
Flow
Plans
was
But, as I
see
to
it,
this
interpretation
United
Guaranty
modifying
of
the
and
language
contract
cannot
be
holds
between
the
key
SunTrust
disregarded.
As
proper
Mortgage
the
and
Virginia
language
in
question
is
clear
and
unambiguous.
It
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.
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
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
underwriting
set
forth
in
the
Master
guidelines
would
originate
with
Policy
was
that
United
Guaranty.
of
SunTrust
Guarantys guidelines.
Mortgages
guidelines
for
United
(3
Call.)
194,
1802
WL
650,
Gatewood v. Burrus, 7
at
*3
(Va.
1802).
And
reference
collateral
Ewell v.
agreement,
which
is
clearly
Inc.,
S.E.2d
of
Virginia,
343
350,
343
(Va.
1986).
United
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).
(Not
merely
must
the
historic
facts
be
free
of
of
United
Guarantys
Guideline
Matrix
and
SunTrust
to
the
underwriting
messages
were
highly
knowledge
by
SunTrust
relevant
guidelines.
evidence
Mortgages
key
that
And
the
displayed
employee
that
email
guilty
SunTrust
question
contract.
of
how
to
Excluding
resolve
this
the
latent
evidence
ambiguity
unfairly
tied
in
the
United
Mortgage
on
United
Guarantys
counterclaim
for
the
unconscionable
to
require
United
Guaranty
to
continue
to
summary,
affirmance
of
respectfully
summary
judgment
dissent
on
from
SunTrust
the
majoritys
Mortgages
claim
concur
with
the
majoritys
sanctions.
34
affirmance
of
the
ruling
on