Plaintiffs Donald Scott and Melissa Scott brought this action for damages, seeking to hold Defendant GMAC Mortgage, LLC ("GMAC") liable for common law fraud and violations of the Homeowners Protection Act of 1998, 12 U.S.C. § 4901 et seq ("HPA"). In the course of discovery, Plaintiffs brought a motion for sanctions pursuant to Rule 37(c), claiming that GMAC failed to disclose information contained in an electronic document clearinghouse, known as "Pilot." (docket no. 88). Upon consideration of the motion, the magistrate judge entered an order granting Plaintiffs attorney fees; prohibiting Defendant from relying on information contained in Pilot for a wide variety of purposes; and recommending that I enter a default judgment holding Defendant liable on the fraud claim, and issue an adverse jury instruction. (docket no. 111). This appeal followed. (docket no. 143).
For the reasons stated herein, and as set forth more fully below, I will modify those portions of the order prohibiting Defendant from relying on information contained in Pilot; adopt the recommendation to enter a default judgment; decline to review, as moot, the issue of an adverse jury instruction; affirm the award of attorney fees and costs; and award further fees and costs associated with this appeal.
Plaintiffs entered a residential mortgage refinance transaction with GMAC in August, 2007. The complaint alleges that in the course of the transaction, GMAC fraudulently misrepresented that the loan would not be encumbered with Lender Paid Mortgage Insurance ("LPMI"); that Defendant failed to disclose the existence of LPMI in the manner required by the Homeowners Protection Act; and that Plaintiffs were unable to refinance their mortgage at a desirable interest rate as a result. GMAC admits liability on the HPA claim, but argues, inter alia, that the two-year statute of limitations for fraud has lapsed, Va. Code §§ 8.01-243, 249, and that Plaintiffs cannot show that they reasonably relied on GMAC's alleged false representations. See Cohn v. Knowledge Connections, Inc., 585 S.E.2d 578, 581 (Va. 2003). Both defenses turn on the extent to which Plaintiffs knew, or should have known, that their loan was encumbered with LPMI when they negotiated and closed on the loan in August, 2007.
Accordingly, the contents and provenance of a number of loan application documents are of great importance. These include:
(i) "General Loan Application Acknowledgment" dated August 3, 2007, signed by Defendant and Plaintiffs, indicating that "[a]t the time of the application, [Plaintiffs'] loan does not require Private MortgageInsurance," (hereinafter, "Loan Acknowledgment");
(ii) "Mortgage Loan Commitment," dated August 6, 2007, signed by Defendant but not Plaintiffs, indicating that "Private Mortgage Insurance is required," (hereinafter, "GMAC Loan Commitment");
(iii) "Mortgage Loan Commitment," dated August 6, 2007, signed by Plaintiffs and Defendant, containing no language concerning private mortgage insurance, (hereinafter, "Scott Loan commitment"); and
(iv) "Notice Regarding Private Mortgage Insurance," dated January 13, 2010, which appears to comply with the HPA's LPMI disclosure requirements, except that it was not timely delivered (hereinafter, "LPMI Notice").
The existence of these documents gives rise to a number of obvious questions, the resolution of which bears directly on the outcome of the case. Any evidence tending to explain the inconsistency among the documents, why the LPMI notice is dated months after the closing, who created these documents, and when, is highly material.
As explained more fully below, it has become evident that the answers to these questions are found in, or at least suggested by, information contained within GMAC's "Pilot" system. According to GMAC's Rule 30(b)(6) designee, Susan Young, "Pilot is the electronic system of record. It is the tool that was utilized to process, underwrite, and close the loan." Former GMAC employee Yvonne Wolert testified that Pilot keeps track of "all the information" needed to close a new loan transaction, including information inputted by the loan processor, underwriters, loan officers, and managers. GMAC used Pilot to map the information from these disparate sources onto the various documents used to process Plaintiffs' loan. Consequently, the allegation that Defendant withheld information contained in Pilot is quite serious.
A party's duty to disclose documents in discovery has a number of bases. First, Rule 26(a) imposes a duty to disclose "without awaiting a discovery request . . . a copy -- or a description by category and location -- of all documents, electronically stored information, and tangible things that the disclosing party has in its possession . . . and may use to support its claims, or defenses . . . ." Fed. R. Civ. P. 26(a)(1)(A)(ii). Second, Rule 34 permits a party to request production of "documents or electronically stored information." Fed. R. Civl. P. 34(a). The responding party may object to the request, but if it is a partial objection, the party must "specify the part and permit inspection of the rest." Fed. R. Civ. P. 34(b)(2)(C).
Pursuant to the pretrial order, Rule 26(a) initial disclosures were due on July 15, 2010. In compliance with the deadline, Defendant produced a number of loan documents. However, those disclosures were not complete. Significantly, Defendant failed to include a copy of what are known as the "contemporaneous notes" from GMAC loan officer Karen Morris. Dated July 31, 2007, the notes indicate that she "[s]poke to Donald [Scott] and discussed 40 Yr. LPMI, 30 Yr. LPMI, 30 year Combo, and 30 Year with MI." And although it appears on the face of the contemporaneous notes that they were printed, or accessed from Pilot, at 11:43 a.m. on August 26, 2010, they were not produced until November 24, 2010, when GMAC appended them as an exhibit to a brief on summary judgment.
Paragraph 2 of Plaintiffs' October 24, 2010 request for production broadly sought the following documents:
For any loans between Plaintiffs and GMAC that were secured by Plaintiffs' home, any and all documents containing, evidencing, referring to, or otherwise involving: (a) conversation/contact/loan logs; . . . (c) all internal GMAC communications; . . . (e) the available options, negotiation, terms, processing, servicing . . . [and] (m) the servicing of any such loan, including responding to inquiries made by or on behalf of Plaintiffs concerning mortgage insurance.
By letter to GMAC dated December 14, 2010, Plaintiffs voiced numerous discovery objections, among them that the late production of the contemporaneous notes had given rise to their suspicion that GMAC was withholding documents. Accordingly, they asked that GMAC "confirm that GMAC has produced every requested document. . . ." In a more concise follow-up letter dated December 17, 2010, Plaintiffs wrote to "make specific demand for documents that we believe should have been provided to us . . . ." The letter proceeds to describe that a "former GMAC employee"*fn1 informed counsel that: the Pilot program should generate a "log" or some other form of evidence that shows: what documents were generated as a part of the loan; when those documents were generated; who accessed those documents; when those documents were accessed; who amended any accessed documents; when any amendments were made; why the amendments were made; etc. In addition, it is our understanding from this source that the contact notes made and stored in the Pilot program, of which your "contemporaneous note" is one, should be numerous.
On December 23, 2010, Defendant's counsel responded, offering to meet and confer on January 3, 2011 to resolve the various issues identified. Prior to the meeting, Plaintiffs filed a motion to compel. Then, by letter dated January 4, 2011, Plaintiffs responded to Defendant's objection that the Paragraph 2 request was overly broad, by agreeing to limit the request "to the subject Loan." However, they noted that "for the reasons stated previously . . . we are concerned that we have not been provided . . . GMAC's entire paper and electronic files." (emphasis added).
On January 20, 2011, the parties appeared before the magistrate judge for a hearing on the motion to compel. Upon counsel's suggestion that the matter could best be resolved out of court, the magistrate judge responded:
[T]he problem is, it's taken this to get us to this point, and there's no excuse for that. The plaintiff has asked, the plaintiff moved, nothing was done, nothing -- things were forthcoming, but it's dribbled in and it's dribbled out, and I want to fix a drop-dead date that the answers to these are as complete as they're going to get. And if there are no answers to them, then [Plaintiffs] can use those no answers however they want to. Nonetheless, he deferred any decision on the motion to allow the parties opportunity to resolve the dispute. After conferring subsequent to the hearing, the parties submitted a number of discovery deadlines to the court, which the magistrate judge adopted by order dated January 25, 2011. The order fixed a February 4, 2011 drop-dead date for Defendant to complete its supplemental responses and document production. Having determined that the matter was resolved, the magistrate judge dismissed the motion to compel without prejudice on January 26, 2011.
On February 4, 2011, in purported compliance with the discovery deadline, Defendant issued its supplemental responses to the request for production of documents. Again, it objected to Paragraph 2 of Plaintiffs' request, asserting that it was overly broad. Despite not having produced any additional Pilot documents, Defendant contended that "GMAC has produced the entire loan file and all notes or communications related to the Loan."
Evidently unsatisfied with Defendant's response, Plaintiffs filed a motion for sanctions on March 4, 2011, on the basis of GMAC's "refus[al] to provide the electronically stored Pilot system information or documents." Upon consideration of the motion, the magistrate judge noted:
The problem with this is when you couple the requirements of Rule 26 with the responses here, an opposing party would have the right to rely on those all the way up through summary judgment and trial. But that isn't what the evidence reveals. There were documents not produced contained in what I would call this clearing house electronic storage medium called the Pilot Program accessible by and to anybody working on the loan, clearly relevant to these proceedings. Whether admissible or not is not the question. But certainly could lead to discoverable evidence, including the preparation of any examination of any ...