                              UNPUBLISHED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Affirmed in part and vacated in part by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.




                               2
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

                                         3
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,

                                              4
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.



                                      5
       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

                                        6
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

                                              7
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



                                         8
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).




                                               9
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).

                                     10
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.




                                               11
       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

                                             12
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.



                                         13
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

                                          14
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

                                             15
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

                                            16
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

                                           17
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

                                                 18
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

                                         19
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).



                                               20
      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

                                             21
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

                                                22
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.

                                           23
                                              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

                                              24
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

                                             25
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.



                                                26
     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.



                                             27
[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




                                    28
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
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

                                         30
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

                                          31
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)
                                   32
      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).


                                            33
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.




                                         34
