Spoliation — Dismissal, Adverse Inference, Disclosure to Jury Inapt Where Adulterated Evidence Was Directed to Issues Ruled Substantively Irrelevant — Eleventh Circuit Sanctions Dismissal Standards

SunTrust Mortgage, Inc. v. United Guaranty Residential Ins. Co. of N.C., 2013 U.S. App. LEXIS 2349 (4th Cir. Feb. 1, 2013):

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 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, 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.

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 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 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. ***

Finally, United Guaranty argues that the district court abused its discretion by declining to impose harsher sanctions for SunTrust Mortgage's misconduct relating to the fraudulent email alterations. The district court ordered SunTrust Mortgage to pay United Guaranty's attorney's fees and expenses incurred in connection with United Guaranty's motion for sanctions, but rejected United Guaranty's motion to dismiss SunTrust Mortgage's complaint altogether. This Court reviews the appropriateness of sanctions imposed by a district court for an abuse of discretion. United States v. Shaffer Equip. Co., 11 F.3d 450, 462 (4th Cir. 1993).

A district court's authority to dismiss a case based on a party's misconduct derives from the court's "inherent power." Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). "Because the inherent power is not regulated by Congress or the people and is particularly subject to abuse, it must be exercised with the greatest restraint and caution, and then only to the extent necessary." Shaffer, 11 F.3d at 461.

The Supreme Court has called dismissal "a particularly severe sanction," yet one that falls within the court's discretion. Chambers, 501 U.S. at 45. This Court has recognized that dismissal may be warranted "when a party deceives a court or abuses the process at a level that is 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 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. 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.

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.

Footnote 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.

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 [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.

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