SunTrust Mortgage, Inc. v. AIG United Guaranty Corporation et al

Filing 662

MEMORANDUM OPINION. Signed by District Judge Robert E. Payne on 3/13/14. (kyou, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division

SUNTRUST MORTGAGE,

INC.,
CLEiiK, U.S. DISTRICT COURT

Plaintiff,

RICHMOND. VA

Civil Action No.

v.

3:09cv529

UNITED GUARANTY RESIDENTIAL
CORPORATION OF NORTH CAROLINA,
Defendant.

MEMORANDUM OPINION

This

GUARANTY'S

COUNT IV

matter

is

REQUEST

before

the

Court

on

DEFENDANT

FOR ENTRY OF FINAL JUDGMENT

(Docket No.

617)

UNITED

ON COUNTERCLAIM

and SUNTRUST'S MOTION

FOR ENTRY OF

JUDGMENT, OR IN THE ALTERNATIVE SUMMARY JUDGMENT, ON COUNT IV OF
UNITED

GUARANTY'S

COUNTERCLAIM

(Docket

Nos.

627

and

628)

following an appeal to the United States Court of Appeals for
the Fourth Circuit.

UNITED

GUARANTY'S

COUNTERCLAIM

For the reasons set forth below,

REQUEST

COUNT

IV

FOR

(Docket

ENTRY

No.

OF

617)

JUDGMENT,

FINAL

will

be

DEFENDANT

JUDGMENT

ON

denied,

and

SUNTRUST'S MOTION

FOR ENTRY OF

SUMMARY JUDGMENT,

ON COUNT IV OF UNITED GUARANTY'S COUNTERCLAIM

(Docket Nos. 627 and 628) will be granted.

OR IN THE ALTERNATIVE

BACKGROUND

In

its

("ST")

Third

Amended

Complaint,

Suntrust

Mortgage,

Inc.

charged United Guaranty Residential Insurance Company of

North Carolina ("UG") with breaching the insurance contract that
it

had

issued

to

on

some

borrowers

ST

insuring

of

ST's

against
mortgage

payment
loans.

defaults
UG

filed

by
a

Counterclaim, Count IV of which sought a declaration that, under
the insurance contract,

those

that

ST

had

ST was obligated to pay premiums beyond

already

paid.1

defenses to Count IV was that,

contract,

Virginia's

One

of ST's

affirmative

because UG had first breached the

"first material

breach

doctrine"

relieved

ST of the obligation to pay those additional premiums.

The pending reciprocal motions present two issues.
it is necessary to determine what is required,
the Fourth Circuit's mandate.

Second,

First,

or permitted, by

if the Court finds that it

is permitted to do so under the mandate,

it must resolve the

substance of ST's first material breach defense.
I.

Resolution

understanding of

1 In

Count

IV

of

(i)

of

THE MANDATE

the

ISSUE

mandate

issue

the history of this case

its

Counterclaim,

UG

necessitates

an

in this Court as

sought

a

"declaratory

judgment stating that SunTrust is obligated under [the insurance
policy] to continue making annual renewal premium payments on
all

loans

in

each

of

the

Loan

Pools,

notwithstanding

that

the

Maximum Cumulative Liability amount
has
been
reached with
respect to a particular Loan Pool." (Counterclaim at 32, SI 4.a.)

reflected

in previous

will be

A.

the

Court

and (iii) the mandate of the Court of Appeals.

of Appeals;

Each

addressed

opinions;

(ii)

the

decision

of

in turn.

District Court Proceedings

On
favor

April

of

UG

26,
on

2011,

Count

IV

of

hereinafter "April 2011 Opinion".)2
held

452,

summary

Counterclaim.

2011),

Court

and

its

entered

Docket

the

451

Court

Order,

Opinion,

Nos.

the

that:

784

F.

"[t]he

Supp.

judgment

(Mem.

2d

in
and

(E.D.

600

Op.

Va.

In the April 2011

insurance

policy

clearly

and unambiguously requires SunTrust ... to pay annual premiums
to

United

Guaranty

.

.

.

for

the

life

of

the

insured

loans,

notwithstanding that UG's Maximum Cumulative Liability . . . for
loss

on

those

loans

has

been

reached."

(April

2011

Opinion

at

2) .

However,
breach

doctrine"

Counterclaim,

ST's

first

During

Court

ST

and

asserted
as

the

material

a conference

realized

an

that

Virginia's

affirmative

Court,

breach
call

by

oversight

defense

to

inadvertence,

defense

with

so-called

in

Count

did

the April

the parties

and,

"first

material

IV

not

2011

on

May

3,

therefore,

on

May

of

UG's

address

Opinion.
2011,

4,

the

2011,

the Court vacated the order that had granted summary judgment on

2

The procedural history predating the Court's entry of summary

judgment in favor of UG on Count
forth in the April 2011 Opinion.

IV of its Counterclaim is

set

Count

IV

of

UG's

Counterclaim

trial and briefing.

for

set

the

matter

for

a

bench

(Order, Docket No. 459, May 4, 2011.)
on May 13, 2011,

Nine days later,
motion

and

summary

judgment

on

the Court addressed ST's

Count

I

of

its

Third

Amended

Complaint and held that UG's denial of ST's claims on IOF Combo

100 Loans3 was a breach of the insurance policy.
the Court
(Order,

granted

summary judgment in

Docket No.

memorandum

476.)

opinion

On June

setting

30,

forth

favor

of

2011,

the Court

the

518, 800 F.

Supp.

2d 722

ST on Count

reasons

summary judgment in favor of ST on Count
No.

On that basis,

I.

for

(Mem.

(E.D. Va. 2011),

I.

issued a

granting

Op.,

Docket

hereinafter "June

2011 Opinion".)

Thereafter,
the

Court

defense

held

August

that

ST

judgment

Counterclaim.
(E.D.

in

(Mem.

Va.

2011,

"met

*first
favor

Op.,

2011),

19,

had

(alternatively,

entered

875

on

its

burden

material
of

Docket

ST
No.

hereinafter

August 2011 Opinion explained the
as

following

a

on

the

breach
on

546,

"August

F.

2011

trial,

affirmative

defense'),"

Count
806

bench

IV
Supp.

of
2d

Opinion".)

and
UG's
872,
The

first material breach defense

follows:

ST's

UG

first

material

materially

breach

breached

the

defense

was

insurance

that

policy

3 IOF Combo 100 Loans are second-lien loans that follow interestonly first-lien loans, with a combined loan-to-value ratio of up
to 100%. (August 2011 Opinion, 806 F. Supp. 2d at 876, n.7;
Trial Tr.

53:25-61:17. )

by " (a)

continuing to collect and failing to

refund premiums on [performing]
IOF Combo
100 Loans [the type of loans at issue in
Count I of the Third Amended Complaint] when
United Guaranty knew it would not pay claims

on those loans; and (b) relying on a legally
unsupportable basis for denying SunTrust's
claims [on defaulted IOF Combo 100 Loans]."

806 F.

Supp.

Opinion,

2d at 875-76.

"Count

overlaps

the

I

of

[ST's]

denying

August

claims

2011

questions
premiums

Third

second of the two

material breach defense:
by

As explained,

on

were

in

Combo

then

limited to

alleged

ST's

Complaint

thus

in ST's

first

alleged breaches

100

Loans."

explained

"whether
first

Id.

that

the

at

the

improper

material

fact a breach of the insurance policy,

breach,

Amended

that UG breached the insurance policy

IOF

Opinion

in the August 2011

breach

and,

The

substantive

collection
defense

was

of
in

if so, whether that

and the breach already found by the Court,

in view of the policy." Id.

876.

(emphasis added).

were material

The underscored

text refers to the breach found in the June 2011 Opinion.
The

August

2011

Opinion

insurance policy both

Loans

and

in

concluded

that

in denying claims

continuing

to

demand

on

and

performing IOF Combo 100 Loans for which it

denied."

Id.

conclusion,

at

888

(emphasis

added).

"UG

collect

the

IOF Combo

ST's

breached

100

premiums

on

knew claims would be

In

reaching

that

the Court analyzed whether UG's continued collection

of premiums "breached its duty to deal in good faith with its

insured on a matter of the insurance contract," id. at 8V90, and
concluded that "in billing for,

and accepting premiums on loans

which it knew it would not cover,

UG breached the duty of good

faith and fair dealing it owed to ST." Id. at 891.
The

policy,

Court

first,

then

found

"that

UG

breached

the

insurance

in denying claims on IOF Combo 100 Loans that are

the subject of Count I of the TAC and,

second, in continuing to

demand and collect premiums on performing IOF Combo 100 Loans on
the

Partlow list,

deny."

Id.

at

although ST

the

900

claims

for

(emphasis

which

added).

it

had decided

Thus,

it

-

policy,"
or

id.,

the

^cumulative'

-

assessing the materiality issue.

Court

only

effect

of

Id. at 902,

burden to prove that

UG's

respecting

payment

insurance."

that,

both

the

defeated

Id.

an

considered

the

breaches"

the
in

"ST has carried its

failures to perform its obligations,
of

essential

at 904

in view of

n.64.

The August 2011 Opinion then concluded:

premiums,

would

clear

is

it

argued that "both breaches were material

insurance

"combined

the

claims

and

purpose

(emphasis added).

the

of

collection

the

of

contract

of

Moreover,

"[h]aving

determined that UG breached the insurance policy in two distinct
ways,

and having now further determined that those breaches were

material under Virginia law in view of the language and purpose
of

the

further

insurance

policy,

performance

on

it

the

follows
contract

that
under

UG

may

the

not

first

sue

for

material

breach doctrine." Id. (emphasis added).

Thereupon,

judgment was

entered in favor of ST on Count IV of UG's Counterclaim.

B.

Proceedings

at the United States Court of Appeals for the

Fourth Circuit

The

breached
claims,
Count

Court

the

insurance

the

affirmed

contract

the

by

decision

not

its Third Amended Complaint.

vacated

the

defense to Count

To

Appeals

timely

that

UG

paying

had

ST's

and it affirmed the grant of summary judgment to ST on

I of

Appeals

of

resolve

issues

decision

IV of

the

UG's

on

ST's

first

the Court of

material

breach

Counterclaim.

mandate

presented

on

However,

issue,

appeal.

it

The

is

useful

to

understand

statement

of

issues

on

appeal as set forth in UG's brief was as follows:

1.

Whether
summary

the

district court erred in granting
to SunTrust on its claim for

judgment

breach of

contract.

2.

Whether the district court erred in granting
judgment
to
SunTrust
on
United
Guaranty's
counterclaim for declaratory judgment.

3.

Whether the district court erred in refusing to
reduce SunTrust's damage award by the amount of
premiums it was excused from paying.

4.

Whether the district court erred in declining to
impose more severe sanctions, including dismissal
of SunTrust's complaint, based on the misconduct
of

SunTrust

lawyers,

and

and

in

its

senior

excluding

executives

evidence

of

and

that

misconduct.

The

statement

follows:

of

issues

as

set

forth

in

ST's

brief

was

as

1.

Whether

"SunTrust

Mortgage

guidelines"

is

unambiguous.

2.

Whether

any

ambiguity

in

"SunTrust

guidelines" must be resolved
because
parol
evidence
is

Mortgage

in SunTrust's favor
not
admissible
to

resolve a patent ambiguity.

3.

Whether any ambiguity in the insurance policy
must be resolved against United Guaranty ("UG"),
the

insurer,

under

the

rule

of

liberal

construction.

4.

Whether the district court correctly rejected
UG's partial integration doctrine theory.

5.

Whether UG waived any right to assert a purported
exclusion based on failing to underwrite loans
using Desktop Underwriter.

6.

Whether

UG

court's

procedure

waived

its
on

objections
the

first

regarding

material

the

breach

defense by failing to move to re-open evidence or
for a

new trial or for JMOL.

7.

Whether

8.

going
forward
because
of
its
first
breach of the policy.
Whether policy renewals are void for

UG is barred

from enforcing

consideration when an insurer

the policy
material

no longer

lack

of

has any

risk.

9.

Whether

the

district

court

correctly

calculated

damages.

10.

Whether
by
the

the discovery-related
district
court
was

sanction fashioned
within
its
broad

discretion.

On appeal of the August 2011 Opinion and Order respecting
the

grant

of

Counterclaim,

summary

UG

argued

judgment

that

to

the

ruling on two purported breaches,

ST

on

district

Count

court

IV

of

"based

UG's

its

both of which were necessary

to

its

conclusion

material

breach."

that

United

(UG's

Guaranty

Opening

Brief,

committed
at

46.)

a

UG

first
further

contended that "the first material breach ruling must be vacated

because it depended on the combined effect of the alleged breach
of contract and the alleged breach of the duty of good faith and

fair dealing."

(Id.)(emphasis added). UG also argued: "But even

if this Court were to affirm the breach of contract finding,4 the
first

material

breach

ruling

cannot

stand,

because

(1)

the

district court erred in concluding that United Guaranty breached
the

duty

of

severable,

good

and

faith

(3)

and

fair

neither

material." (Id. at 46-47.)

of

dealing,

the

material ("[W]ith both breaches,
only purpose

of the

the

alleged

contract

breaches

is

was

ST argued in its response brief that

UG had breached the policy in two ways,

the

(2)

that both breaches were

UG failed to provide coverage -

contract") , and that

it

did not

waive

its "first material breach defense."5 (ST's Brief, at 45-55.)

4 The

Court

of Appeals

did,

in

fact,

affirm

the

breach

of

contract finding.

5 ST's brief on this point is a bit confusing because it argues
in the heading that it "did not waive its first material breach
defense," but argues more precisely in the text that it "did not

waive its right to assert UG's breach of the implied covenant of
good faith and fair dealing."

different

issues

that

(ST's Brief,

overlap

in

part.

at 52.)

The

These are two

Court

of Appeals

ruled only that ST waived its right to assert UG's breach of the

implied covenant of good faith and fair dealing,

but it did not

address

had

the

district

court's

conclusion

that

ST

its right to assert its first material breach defense.

not

waived

In announcing its decision, the Court of Appeals explained
that

and

it

would

"affirm

sanctions

and

the

district

evidentiary

court's

rulings

breach

and

of

vacate

contract

as

to

district court's first material breach determination."6
No. 609, Slip Op. at 3,

2013).)
for

(Docket

(4th Cir. Feb.

1,

The Court of Appeals first held that "summary judgment

SunTrust

proper."

Mortgage

[]

Mortgage

on

its

breach

F.

508

at

251.

Next,

district

also

noted

court

that

on

good faith

erred

"even

Guaranty

applicable

App'x

waived the

the

United

508 F. App'x 243, 245

the

in

Virginia

law

and

and

held

fair

state

that

Id.

would

"even

have

claim

at

253.

not

have

the

was

"SunTrust

dealing issue,

it."

law

that

would not

contract

it

considering

notice,"

substantive

of

and
It

put

undisputedly

suggested

to United

Guaranty that an implied covenant of good faith and fair dealing
claim

inhered

at 253-54.
"vacate[d]

in

SunTrust's

first

material

In summarizing its decision,
the

district

court's

judgment

Mortgage as to first material breach,

breach

the
in

the

did not

Court

address whether UG's

affirmed),

standing

Id.

Court of Appeals
favor

of

SunTrust

which relied on the good

faith and fair dealing determination." Id. at 254.

Appeals

defense."

breach of

alone,

The Court of

contract

constituted

a

(which
first

6 The references to the "sanctions and evidentiary rulings" are
immaterial to the issues presented by the pending motions.
10

material breach of the insurance policy.7
The

the

parties

Court

Appeals
which

disagree

of Appeals.

"vacated

was

the

UG

this

basis

about

the

contends

Court's

for

this

effect

that,

first
Court's

of

the

because

material

decision

the

Court of

breach

withdrawal

of

of

ruling,

its- Order

granting summary judgment in favor of Defendant on Counterclaim
Count

IV

and

its

entry

of

judgment

SunTrust on Counterclaim Count

its

Order

Judgment

Final

No.
fact

granting

on

Defendant's

Counterclaim Count

favor

Court

Renewed

IV

Plaintiff

should "reinstate

Motion

[Docket

of

No.

for

452],

Summary

and

Judgment for Defendant on Counterclaim Count IV."

617 at 2.)
and

effective

Appeals

ST contends that,

conclusions
after

the

of

law

decision

(Docket

"[b]ased on prior findings of

made
of

enter

by
the

the

Court

United

that

States

remain

Court

of

. . ., SunTrust is entitled to judgment as a matter of

law on Count IV." (Docket Nos.
C.

IV," the

in

629 & 630, at 1.)

The Mandate Rule

With the foregoing procedural background in mind, it is now
time to turn to the mandate rule and its application here.
"Few

legal

concepts

are

as

firmly

established

as

the

7 Nor did the Court of Appeals address UG's arguments that
"the contract was severable" or that "neither of the alleged
breaches was material."
Nor did it address ST's arguments in
response
was

not

that

both breaches were material

severable.

11

and that

the

contract

doctrine that the mandate of a higher court is controlling as to
matters within its compass." United States v.
66

(4th Cir.

Court

1993).

In considering

"may not deviate

from

[the]

Bell,

the parties'
mandate

but

5 F.3d 64,

motions,

the

is required

to

give full effect to its execution." Invention Submission Corp.
v.

Dudas,

rule'

and

413

F.3d

411,

414

(4th

Cir.

2005).

"This

'mandate

is a more powerful version of the law of the case doctrine

is

based

on

'the

principle

that

an

inferior

tribunal

is

bound to honor the mandate of a superior court within a single
judicial system.'"

Invention Submission Corp.,

413 F.3d at 414

(citations omitted).

When appellate courts have "executed their power in a cause

before them,
further act
shall

send

Sibbald v.

and their final decree or judgment requires some
to be

a

done,

[they]

special mandate

United States,

cannot

to

37 U.S.

the

issue

court

488,

an execution,

below

to

award

Whatever was before the [appellate court],
and is disposed of, is considered as finally
settled. The inferior court is bound by the
as

the

law

of

the

case;

and

must

carry it into execution, according to the
mandate. They cannot vary it, or examine it
for any other purpose than execution; or
give any other or further relief; or review

it

upon

error
further

any

matter

apparent;
than

to

or

decided

on

appeal

for

with

it,

has

been

intermeddle

settle

remanded.

12

so

it."

492 (1838). The Supreme

Court in Sibbald went on to declare that:

decree

but

much

as

Id.

If

[the

the

lower court

appellate]

"mistakes

court,

or misconstrues

and does not give

the decree

of

full effect to the

mandate, its action may be controlled, either upon a new appeal
. . . or by a writ of mandamus to execute the mandate of [the
appellate] court." In re Sanford Fork & Tool Co.,
255

(18 95).

However,

the lower court

160 U.S. 247,

"may consider and decide

any matters left open by the mandate of

[the appellate] court;

and its decision on such matters can be reviewed by a new appeal
only."

Id.

at 256.

And,

of course,

"the opinion delivered by

[the Court of Appeals], at the time of rendering its decree, may
be consulted to ascertain what was intended by its mandate; and,

either upon an application for a writ of mandamus, or upon a new
appeal,

it is for [that]

court to construe its own mandate,

and

to act accordingly." Id.

The

Court

mandate

of

Appeals

recently

rule requires that the district

the letter and spirit of the
[the

pointed

Court

of

Appeals']

court

710

omitted).

F.3d

"[T]he

527,

that

"[t]he

'implement both

. . . mandate, taking into account
opinion

and

the

embraces.'" Georgia-Pacific Consumer Products,
Corp.,

out

536

mandate rule

n.13

(4th

also

circumstances

LP v.

Cir.

'forecloses

it

Von Drehle

2013) (citations

litigation

of

issues decided by the district court but foregone on appeal or
otherwise

the

waived,

district

for

example

court.'"

Id.

because

they were

(citation
13

not

raised in

omitted)(emphasis

in

original).
It

also

relitigation
appellate

356

is

of

settled

issues

court.'"

F.3d

576,

"[a]lthough

S.

584

the

that

"the

expressly

mandate

or

impliedly

Atlantic Ltd.

(4th

doctrine

Cir.

rule

P'ship

of

decided
Tenn.

2004)(citation

applies

both

to

'forecloses

by

v.

Riese,

omitted).

questions

the

But,

actually

decided as well as to those decided by necessary implication,

it

does not reach questions which might have been decided but were
not."

Sejman v.

Warner-Lambert

Co.,

Inc.,

845

F.2d 66,

the

resolution

69

(4th

Cir. 1988)(citation omitted).8
These
issue

D.

principles

in this

control

of

the

mandate

case.

Application Of The Mandate Rule

The

Court

vacat[ed]

of

Appeals'

decision

in part the orders

"affirm[ed]

on appeal."

508 F.

in

part

and

App'x at 256.

The decision contains no explicit remand to this Court,

but

an

explicit remand was not necessary because the effect of issuing
the

mandate

was

Moore & Son,

121-122
once

Inc.

(E.D.

issued,

to

return

the

case

to

v. Drewry & Assocs.,

this

Inc.,

Court.

945

F.

Gerald

Supp.

M.

117,

Va. 1996) ("[T]he mandate of the court of appeals,
returns

[the

case]

to

the

district

court.").

"The law of the case doctrine applies to an appellate court's
ruling both if the case is on appeal of a final judgment or if
the appeal is interlocutory."
McCullen v. Coakley, 759 F. Supp.
2d 133,

137

(D. Mass.

2010) (citations omitted).

14

Simply put,
Rivera,
v.

844

jurisdiction follows the mandate." United States v.
921

(2d Cir.

553 F.3d 161,

Owen,

F.2d 916,

164

(2d Cir.

Here,

the

judgment

1988) (cited in United States
2009)).

reviewed

on

appeal

was

reviewed

as

a

final judgment on less than all claims, but it did not dispose
of

the

Court

entire

case.

entered

a

FINAL

which stated that
and

the

That

is because

JUDGMENT

ORDER

on

October

PURSUANT

TO

"[t]he relationship among the

unresolved

ones

suggests

that

the

3,

2011,
RULE

this

54(b),

decided claims

litigation

will

be

materially advanced by immediate appeal," and that "[e]ntry of a
final judgment respecting fewer than all

claims brought in this

action is appropriate under Rule 54(b)."

(Docket No.

2.)

Thus,

decision

it

on

was

clear

appeal,

the

on

the

matter

record

would

that,

return

581,. at

following

to

the

1-

the

district

court for further proceedings.
The

question

intended by

U.S.

at

[the]

256,

what

for

"what

was

mandate," In re Sanford Fork & Tool Co.,

160

was

necessary implication,
not.

Sejman,

the

Court

actually

to

determine

decided,

now

what

is

was

decided

by

and what might have been decided but was

845 F.2d at 69.

In this case,

the Court of Appeals decided several issues.

The Court of Appeals ruled that the Court's granting of summary
judgment

in

favor

of

ST

on

its

15

breach

of

contract

claim

was

proper and affirmed

that decision.9

It also held that ST had

waived the issue of UG's alleged breach of the implied covenant
of good faith and fair dealing because of the

it was raised,
the

judgment

and,

in

as a result,

favor

of

ST

"late date" when

the Court of Appeals vacated

on Count

IV of

UG's

Counterclaim.

The effect of the vacatur was to "return[] the parties to their
original

positions,

before

the

now-vacated

Bryan v. BellSouth Communications,
Cir.

2007).

"[W]hen

never existed."

To

assess

an

order

is

Inc.,

vacated

order

was

issued."

492 F.3d 231,
it

is

as

if

241
the

(4th
order

Id.

the

effect

of

the

vacatur

here,

it

is

well

to

remember the panoply of rulings available to an appellate court.

Specifically,
modify,

a

vacate,

"court
set

of

aside

appellate
or reverse

jurisdiction
any

judgment,

may

affirm,

decree,

or

order of a court lawfully brought before it for review . . . ."

28 U.S.C.

§ 2106.

Here,

the Court

of Appeals

did not

reverse

this Court's determination that UG had materially breached the
contract but instead "vacate[d] 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." 508 F.

App'x at 254

(emphasis added).

As

explained in Kelso

v.

U.S.

9 The Court of Appeals also ruled that this Court did not abuse
its
discretion
in
declining
harsher
sanctions
for
ST's
misconduct
related
to
the
fraudulent
email
alterations,
affirming that decision.

16

Dept.

of

omitted),

State,

13

F.

Supp.

2d

12,

"the distinction between

18

(D.D.C.

'reverse,'

1998) (citation

on the one hand,

and 'modify' or 'vacate,' on the other, represents far more than

a quibble about semantics."
"Black's

Law

Dictionary

As the court in Kelso points out,

further

underscores

the

distinction

between vacatur and reversal," noting that

"[a]lthough the word

reverse

annul'

aside,'

shares

vacate's

meanings

reverse a judgment means
make

it

void,

undo

or

'to

set

more extensive definition:

[], it has an additional,

of

'to

and

'To

to overthrow it by contrary decision,
annul

it

for

error. '"

Id.

(citations

omitted)(emphasis in original).

The

Court

of Appeals

addressed the

four

issues

raised by

UG.10 Issue 1, "[w]hether the district court erred in granting
summary

judgment

contract," was

to

SunTrust

resolved by

the

on

its

claim

for

Court of Appeals'

breach

of

decision that

the district court had not erred and that its granting summary
judgment

proper.
judgment

in

favor

of

ST

on

its

breach

of

contract

claim

was

Issue 2, "[w]nether the district court erred in granting
to

declaratory

SunTrust

on

judgment,"

was

United

Guaranty's

resolved

by

the

counterclaim

Court

of

for

Appeals'

decision that the district court had erred in considering the
good

faith

material

and

fair

dealing

breach defense.

Issue

issue
3,

when

deciding

"[w]nether the

10 Those issues are set out fully supra, at 7.
17

ST's

district

first
court

erred

in

damage

award

paying,"

was

declared

moot by the Court of Appeals because of

its ruling on

Issue 2.

Issue

erred

amount

refusing

of

more

the

the

severe

with

the

Court

excused

district

(1)

regard

district

of

SunTrust's

sanctions,"

decision that:

discretion
of

was

"[w]nether

Appeals'

some

reduce

it

premiums

4,

impose

to

court

was

in

resolved

the

declining

by

the

Court

to

of

the district court did not abuse its

to

some

court's

Appeals

from

by

of

its

alleged

affirmed

the

decisions;
errors

and

were

district

that

moot

court's

(2)

because

grant

of

all,

of

summary judgment in favor of ST.
The

Court

of Appeals

also addressed most,

but

the issues raised by ST in its response brief.11
4,

and

affirmed
breach

5

necessarily
the

of

grant

of

contract

Complaint) . Issue

waived

the

resolved

summary
claim

6 was

necessarily subsumed

had

were

in

issue

judgment

(Count

not

I

in
of

UG's

of

fashioned

by

the

Court

favor
ST's

Appeals'

alleged

covenant of good faith and fair dealing.
sanction

the

Issues 1, 2, 3,

district

of

of

ST

Third

specifically addressed,

the Court

of

when

not

but

decision

breach

of

the

Appeals
on

the

Amended

it

was

that

ST

implied

Issue 10, regarding the

court,

three issues raised by ST were not resolved.

was

resolved.

But,

Issue 7, "[w]hether

UG is barred from enforcing the policy going forward because of

ii

Those issues are set forth fully supra,

at 8

its first material breach of the policy," remains unresolved and
is

the precise issue now facing this Court.

policy

renewals

are

void

for

lack

of

Issue 8, "[w]nether

consideration

when

an

insurer no longer has any risk," was not addressed by the Court

of

Appeals.12

correctly

And,

Issue

calculated

9,

"[w]nether

damages,"

was

the

district

determined

by

the

court

Court

of

Appeals to be moot.

There were other more
Appeals did not address,

specific arguments that the Court of

including UG's

arguments that "neither

of the alleged breaches was material" and that "the contract was

severable."

ST's

argument

that

UG

breached

the

policy

in

two

ways was addressed only in part by the Court of Appeals when it
ruled

in

Court

favor

did

not

arguments)
contract

of

on

its

breach

address

ST's

both

breaches

that

was

ST

not

alleged

breach

contract

arguments
were

(which

material

claim,

but

mirrored
and

that

the
UG's
the

severable.

Contrary to UG's arguments,

Court of Appeals

of

the Court cannot agree that the

"necessarily rejected the proposition that the
of

contract

material breach ruling."

alone

could

Once the Court

support

the

first

of Appeals ruled that

12 This argument was an alternative to ST's first material breach
argument. ST argued that "UG also is not entitled to continued
renewal premiums after the MCL is reached because there is a

failure
added) .)

not

of

consideration."

ST raised that

necessary

to

address

(ST's

Brief,

issue in the district

it

because

of

the

judgment on the first material breach defense.
19

at

60

(emphasis

court but

grant

of

it was

summary

ST had waived the issue of UG's alleged breach of the implied
covenant of good
merely

faith

vacated this

and

fair dealing,

Court's

judgment

in

the

Court

favor

of

of Appeals

ST

as

to

the

first material breach, because this Court's judgment had "relied
on

the

good

faith

and

record is clear that
material

dealing

determination."

ST asserted two

first

the Third Amended Complaint;

and

(2)

the breach of the duty of

The

Court

fair

dealing.

of

in

the

breach

and

involved

for

the

the

faith

defense:

predicates

But,

(1)

good

breach

fair

Count

Appeals,

I

of

having

concluded that ST had waived the right to assert one ground of
the

alleged

breach

on

which

the

district

court

relied,

and

having found in favor of ST on the other breach, simply vacated
this

Court's

judgment

on

the

first

material

breach

issue,

leaving for resolution on remand the issue whether the breach of

contract
appeal,

by

UG

found

standing

by

alone

the

was

a

district
first

court,

material

and

sustained

breach

provide a defense to Count IV of UG's Counterclaim.

that

on

would

Indeed,

it

is not surprising that the Court of Appeals did not address the
separate

ground

(the

breach

of

contract)

because

the

district

court opinion under review had relied on the combined effect of

that breach and the good faith breach.

Nor

with

does

UG's

argument

respecting

regard to damages persuade that

the

the

appellate

decision

Court of Appeals has

concluded that the first material breach defense is completely
20

invalid.

Once

the

Court

of

Appeals

material

breach determination,

it

vacated

had

no

this

Court's

option

but

to

first

reject

UG's argument with regard to damages as moot.
For

the

foregoing

Appeals

permits

breach

of

this

reasons,

Court,

contract

(the

on

the

mandate

remand,

denial

of

to

of

the

decide

claims

Court

whether

without

of

UG's

legal

justification), which determination was affirmed by the Court of
Appeals,

constitutes

a

first

material

breach

when

considered

alone.13

II.

It

THE

is

SUBSTANTIVE

settled

ISSUE:

under

MATERIALITY OF UG'S BREACH

Virginia

law

that,

"[g]enerally,

a

party who commits the first breach of a contract is not entitled
to enforce the contract." Horton v.

(Va. 1997) (citations omitted).
when

the

breach

only

to

a

omitted).
is so
that
Id.

did

minor

not

part

of

487

S.E.2d 200,

203

"An exception to this rule arises

to

the

the

'root

of

the

consideration."

contract'
Id.

but

(citations

"A material breach is a failure to do something that

fundamental

to

the

obligation defeats
at

go

Horton,

204

(citations

13 As noted previously,

contract

an

that

essential

omitted).

A

the Court

the

purpose

material

failure
of

the

breach

to perform
contract."
includes

a

stated in its August 2011

Opinion that "UG's refusal to pay such a significant portion of
its total coverage obligation was certainly a material breach of
the policy." Id. at 903. But the Court also noted that "it is
appropriate to consider the combined - or 'cumulative' - effect
of the breaches," and that is what the Court did.
21

"failure

of

consideration

of

such

a

degree

that

the

remaining

consideration may be deemed to be no substantial consideration."
Neely v.

White,

14

S.E.2d

breach is material,
from

performing

337,

341

(Va.

1941).

the other party to

his

contractual

the

"If

the

is

contract

obligations."

initial

excused

Horton

at

204

(citations omitted).

The

dispositive

contract

was

"so

question

central

here

to

is

the

parties'

defeated an essential purpose of the
whether

the

breach

reasonably
previously

has

substantially

expected

affirmed,
ST's

under

the

determined,

whether

breach

of

that

it

agreement

[insurance policy]," i.e.,

denied

insurance

and

UG's

as

the

ST

the

policy.
Court

benefit

As

of

the

it

Court

Appeals

has

UG breached the insurance policy by denying claims on

IOF Combo

100

Loans

without

legal

justification for doing

so.

The

the

materiality

analysis,

to

undisputed record evidence that

insured were

known

to

carry

standard mortgage loans.

first

lien

losses.

risk

as

is

Id.

becomes

paid

Also,

worse

market.

Id. at 57.

against

the

Trial Tr.

first

as

ST's

in

more

so

that

Mr.

the

that

the

risk

IOF
for

55-58.

the

breach,

Combo
the

of

being
than

That is because the

second

a

loans

with

mortgagor

lien

Partlow explained,

event

begins

absorbs

that

declining

the

inherent

real

estate

The purpose of having insurance was to guard

reasonably

foreseeable
22

consequences

of

a declining

real estate market.

As Mr.

for the bad times.

Like insurance,

the bad times."

at

at,

it

was

United

Id.
as

Id.

known

States

real

The parties
the 1980' s.

again,
our

that

Partlow put it:

60.

And,

"times

market

. . we're paying

you want that insurance for

when this

there were

estate

".

when

contract was arrived

in the

the

history of

market

has

Id.

at

earnings

the bad times." Id.
In

sum,

tumbled."

knew that the market had "tumbled" as recently
60-61.

Knowing that bad times could come

ST was "paying insurance in the good times,

[ST's]

the

it

in

the good times,

to

borrowing on

protect ourselves

in

There was no evidence to the contrary.

is

undisputed

that

the

very

purpose

of

this

contract was to secure unto ST in bad times payments from UG to

replace those that ordinarily in good times would be paid by the

borrower.

Having those

funds

in declining

real

estate markets

was for ST the very core of the contract at issue.
And,

on

a

of

course,

monthly

the borrowers paid their mortgage payments

basis.

So

timely

payments

by

essential to replace the payment stream no
defaulting

borrowers.

summarized

the

In

importance

payment of claims,
Pursuant

the

of

August

the

the

insurer

longer being made by

2011

Opinion,

contractual

right

holding that:
to

Section

6.3

of

the

Master

Policy,
ST paid premiums in exchange for
UG's promise to pay claims within sixty days
of their being made. ST Ex. 3 § 6.3; see
also

Trial

Tr.

410:1-16;

23

were

421:12-22.

The

the

to

Court

prompt

timeliness of
critical
not
indicated

it

UG's payment of claims was
just
because
the
policy
was,

but

also

because

ST

had

purchased
insurance
from
UG
to
protect
itself in precisely the type of situation in
which

it

found

itself

2008, and 2009, when
denied.
During those
banks,

was

national

under

95:24-96:23.

real

It

and

stress

of

the

estate

is

around

2007,

its claims were being
years,
ST, like most

severe

collapse

residential

in

from

markets.

hollow

the

stock

for

and

Trial

UG

to

Tr.

claim

that substantially delayed receipt of the
insurance
coverage
is
tantamount
to
receiving the insurance proceeds within the
time specified by the policy and that ST
needed,
and had contemplated needing,
in
those years.

806 F. Supp.
of

its

ST's

claims

decision

2d at
was

to

902.
an

This has

integral

purchase

not

changed.

feature

insurance

of

both

from

"Timely payment
the

UG."

policy

Id.

at

and

903.

Wholly apart from the alleged breach of the implied covenant of

good faith and fair dealing,

breach of UG's obligation to timely

pay valid claims was central to the insurance contract.
In addition to the timeliness issue,

the

Court

previously

has

held,

that

the record showed,

"the

magnitude

denial of claims forced substantial hardship on ST." Id.
In June 2009, shortly before ST filed suit,
the claims outstanding for IOF Combo 100
loans was approximately $63 million. ST Ex.
74;
Trial
Tr.
410:1-16.
This
outstanding
balance

equated

to

more

than

25%

of

UG's

total coverage obligation at that time for
the
six
pools
containing
IOF
Combo
100
Loans.
UG's
refusal
to
pay
such
a
significant portion of its total coverage
obligation was certainly a material breach
24

of

and

UG's

of the policy.
Id.

at

902-03;

see

also

Trial

Farnsworth on Contracts § 8.16,

appropriate to measure

that

it

will

196:4-197:24.

Citing

the Court also noted that it was

the effect

of UG's

June 2009 and not some later time,

argue

Tr.

ultimately

denial

as UG argued.

provide

more

of claims

in

UG continues to

than

97%

of

the

consideration - $280 million out of $287 million - that ST could

have

the

expected to

Court

there,

receive

addressed

in

order

required to

contract,

in the August

to

ignore

under the

accept

both

UG's

2011

argument

Opinion.14

position,

the policy's

an

the

As noted

Court

sixty-day

that

would

limit

be

for the

payment of claims and ST's reasons for procuring insurance from
UG

on

the

Moreover,

time

loans

whether

at

issue.

a

of the breach,

Farnsworth

on

first

not

Contracts

See

806

breach

years
§

F.

2d

is material

later,

8.16

Supp.

is

as UG's

("The

at

903

n.65.

judged at

the

argument posits.

time

for

determining

materiality is the time of the breach . . . .").

The

protect

essential purpose of the

against

second-lien
estate

the

loan,

market.

a

ST's

higher
risk

risk

that

purpose

insurance policy here was

presented

increased

was

to

in

protect

by
a

this

type

declining

itself

in

the

to

of
real
bad

times by ensuring that it would be paid promptly after making a

14 The Court also explained why UG's reliance on Neely v. White
was misplaced, and those explanations
806 F. Supp. 2d at 903-04 & n.65.
25

are

incorporated herein.

claim

to

maintain

its

cash

flow.

On

this

record,

UG's

breach

substantially denied ST the benefit it reasonably expected under
the insurance policy and, thus,

constitutes a material breach of

the insurance policy.

For

the

foregoing

reasons,

application

of

Virginia

law

necessitates the conclusion that the breach by UG in not paying

the claims when they should have been paid went to the root
the

insurance

contract

and

defeated

its

essential

of

purpose.

Thus, the first breach by UG was a material one.15
Both UG and ST cite the Restatement

241 in making their arguments.
Opinion

and

by

the

Court

of

(Second)

of Contracts §

As observed in the August 2011
Appeals,

the

Supreme

Court

of

Virginia has not formally adopted Section 241 of the Restatement
with its multi-factor test.

1514

(806 F. Supp.
(1)

See 508

2d at 901) n.63).

the extent to which
will be deprived of

F. App'x at 253

(citing J.A.

The factors are:

the
the
he reasonably expected;

injured
benefit

party
which

15 UG argues that application of the first material breach rule
here
would
impose
a
forfeiture
on
UG.
That
argument
was
addressed in the August 2011 Opinion, 806 F. Supp. 2d at 903-04.
Those reasons are incorporated herein, and the Court reconfirms
its determination that relieving ST of its obligation to pay
additional premiums will not result in a forfeiture to UG.
Previously, the Court also determined that the insurance
policy was not severable.
The Court of Appeals did not address
that
determination.
Accordingly,
for
the
reasons
set
forth
previously in the August 2011 Opinion, 806 F. Supp. 2d at 904911, which are incorporated herein, the Court reconfirms its
determination that the policy is not severable.

26

(2)

the extent to which the injured party
can be adequately compensated for the
part of that benefit of which he will
be deprived;

(3)

the extent to which the party failing
to perform or to offer to perform will
suffer forfeiture;

(4)

the likelihood that the party failing
to perform or to offer to perform will
cure his failure, taking account of all
the
circumstances
including
any
reasonable assurances;

(5)

and

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.

The Fourth Circuit's decision certainly forecloses consideration
of

the

the

fifth

first

factor even if §

material

decision did not

analysis,

breach

prohibit

241

is

available to help analyze

issue.

Although

examination of

§

241

the

appellate

in making

that

this opinion does not accept the invitation to rely on

it.

Nonetheless,

Virginia

a review of

demonstrates

that,

decisions

although

of the Supreme Court of

there

has

been

no

formal

adoption of Section 241, some of the decisions do address one or
more

of

the

particular

five

factor

factors
(1)

-

without
the

reasonably expected benefit.

identifying

extent

For

of

example,

the

such,

deprivation

of

in
the

in two cases in which

the complainants sought specific performance,

27

them as

one could conclude

that the court applied principles quite similar to the factors

that now appear in the Restatement16 in the analyses and denied
the bill for specific performance.

In Cox v. Cox, 26 Gratt. 305

(Va. 1875), Virginia's highest court (then the Court of Appeals)

applied precepts that strongly resemble Restatement factors (1)
(the extent of the deprivation of the reasonably expected
benefit), (2) (the extent to which the injured party can be

adequately compensated for the deprivation),

and

(3)

(the

forfeiture suffered by the breaching party) in its discussion of
the materiality of the breach.

In Grubb Bros, v. Moore, Clemens

& co., 60 S.E. 757 (1908), the Virginia Court of Appeals applied

principles similar to Restatement factors (1) and (5) (the good
faith and fair dealing factor).17 In both Federal Ins. Co. v.

Starr Electric Co., 410 S.E.2d 684 (Va. 1991) and Countryside
Orthopaedics, P.C.. v. Peyton, 541 S.E.2d 279 (Va. 2001), the
decisions

cited

as

Restatement factor (1).

important

reasoning

that

approximates

In Neely v. White, the Supreme Court of

Virginia court applied principles that are now Restatement
16 The Restatement of the Law of Contracts was approved and

promulgated in May 1932,

and the Restatement

(Second)

of

Contracts was approved and promulgated in April 1981.

17 Interestingly, the Grubb Bros, decision also suggests that the
first breach might not preclude damages. But shortly thereafter,
in 1921, the Supreme Court of Virginia stated: "The rule is
strict and inflexible that a plaintiff has no right of action

for damages for breach of contract where he himself has breached

the contract." Johnson v. Hoffman, 107 S.E. 645, 648 (Va. 1921).
28

factors

(1)

and

(2),

and

in

Horton,

the

Supreme

Court

of

Virginia applied reasoning that strongly resembles Restatement
factors (1), (2), and (4) (the cure factor).

Thus, if § 241, excepting factor (5), were found to provide

the guide to decision, the result would be the same. Factor (4)
(the cure factor)

explained

is not applicable on this record. And, as

previously,

ST

was

deprived

of

the

benefit

it

reasonably expected (factor (1)), thereby animating the first
material breach doctrine, and application of the doctrine does
not work a forfeiture on UG (factor (3)). Factor (2), of course,

must be applied at the time of the first breach, and there is no
evidence

that

contract

and

ST

could

benefit

have

other

been
than

compensated

for

the

receiving

the

insurance

by

lost

payments.
CONCLUSION

For the reasons stated above, ST has met its burden on its

first material breach defense, and judgment will be entered for
ST on Count IV of UG's

Counterclaim.

The DEFENDANT UNITED

GUARANTY'S REQUEST FOR ENTRY OF FINAL JUDGMENT ON COUNTERCLAIM

COUNT IV (Docket No. 617) will be denied, and SUNTRUST'S MOTION
FOR ENTRY OF JUDGMENT, OR IN THE ALTERNATIVE SUMMARY JUDGMENT,

ON COUNT IV OF UNITED GUARANTY'S COUNTERCLAIM (Docket Nos. 627

29

and 628) will be granted.
It

is

so ORDERED.

Htf

is/
Robert E. Payne
Senior United States District Judge

Richmond, Virginia

Date:

March l$_, 2014

30