UNPUBLISHED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
2

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Affirmed in part and vacated in part by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.
3

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 
4

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, 
5

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.
6

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 
7

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 
8

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 
9

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).

 
10

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).
11

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. 
12

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 
13

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. 
14

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 
15

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 
16

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 
17

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 
18

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 
19

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 
20

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).
21

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 
22

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 
23

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. 
24

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 email 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 
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 
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.
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.
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
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 
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 
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 
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)
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).
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.