Title: Schmidt v. Household Finance Corp.

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Keenan, Koontz, Kinser, Lemons, Agee, and 
Goodwyn, JJ., and Russell, S.J. 
 
HARALD SCHMIDT 
 
v.  Record No. 071292  OPINION BY JUSTICE CYNTHIA D. KINSER 
 
 
 
 
 
 
 
June 6, 2008 
HOUSEHOLD FINANCE CORPORATION, II, D/B/A 
HOUSEHOLD FINANCE CORP. OF VIRGINIA 
 
FROM THE CIRCUIT COURT OF PRINCE WILLIAM COUNTY 
Lon E. Farris, Judge 
 
 
This dispute arose out of a mortgage loan entered into 
by Harald Schmidt.  The issues on appeal are whether the 
circuit court erred by sustaining both a demurrer to a 
claim for rescission of the mortgage loan and a plea in bar 
of the applicable statutes of limitation as to claims for 
actual fraud and constructive fraud, along with violations 
of the Virginia Consumer Protection Act (VCPA), Code 
§ 59.1-196 et seq.; the Truth in Lending Act (TILA), 15 
U.S.C § 1601 et seq. (2000 & Supp. V 2005); and the Real 
Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601 
et seq. (2000 & Supp. V 2005). 
We will affirm the circuit court’s judgment sustaining 
the demurrer because Schmidt did not allege sufficient 
facts to state a cause of action for rescission of a 
contract.  Similarly, we will affirm the circuit court’s 
judgment sustaining the plea in bar because Schmidt did not 
allege facts demonstrating that, despite the exercise of 
due diligence, he could not have discovered the alleged 
fraud within the applicable statutory limitation periods 
preceding his commencement of the action. 
I. STANDARD OF REVIEW 
The purpose of a demurrer is to “ ‘test[] the legal 
sufficiency of facts alleged in pleadings.’ ”  Augusta Mut. 
Ins. Co. v. Mason, 274 Va. 199, 204, 645 S.E.2d 290, 293 
(2007) (quoting Glazebrook v. Board of Supervisors, 266 Va. 
550, 554, 587 S.E.2d 589, 591 (2003)).  We “accept as true 
all properly pled facts and all inferences fairly drawn 
from those facts.”  Id.  The circuit court’s decision to 
sustain a demurrer involves issues of law; thus, this Court 
will review that decision de novo.  Id. (citing Dreher v. 
Budget Rent-A-Car Sys., 272 Va. 390, 395, 634 S.E.2d 324, 
326-27 (2006)). 
With regard to the plea in bar, the parties did not 
introduce any evidence but, instead, presented the statutes 
of limitation issues to the circuit court based solely on 
the pleadings.  Therefore, “the trial court, and the 
appellate court upon review, consider solely the pleadings 
in resolving the issue[s] presented.”  Niese v. City of 
Alexandria, 264 Va. 230, 233, 564 S.E.2d 127, 129 (2002) 
(citing Lostrangio v. Laingford, 261 Va. 495, 497, 544 
S.E.2d 357, 358 (2001)).  This Court accepts as true the 
 
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facts stated in the plaintiff’s pleadings for purposes of 
resolving the plea in bar.  See id. 
II. MATERIAL FACTS AND PROCEEDINGS 
In an amended complaint, Schmidt recounted the events 
surrounding a mortgage loan that he entered into on 
February 28, 2002.1  According to Schmidt, he submitted a 
mortgage loan application to Household Finance Corporation 
II, d/b/a Household Finance Corp. of Virginia (Household 
Finance), in response to a telephone solicitation from a 
Household Finance employee.  Household Finance then offered 
Schmidt a mortgage loan with a lower interest rate and 
shorter term than his existing mortgage loan.  The loan, 
however, would have prepaid finance charges of $17,467.10. 
Schmidt met with two Household Finance employees at 
its office in the City of Fairfax.  The employees allegedly 
told Schmidt that they could not execute the loan documents 
at the Household Finance office but, instead, needed to go 
to a nearby restaurant to do so.  When the notary public 
                     
1  We recite only the allegations Schmidt asserted in 
the amended complaint because he did not incorporate the 
allegations set forth in his initial, pro se complaint.  
See Yuzefovsky v. St. John’s Wood Apartments, 261 Va. 97, 
102, 540 S.E.2d 134, 136 (2001). 
The parties do not dispute that Schmidt originally 
filed his action in November 2005 in the Circuit Court of 
Fairfax County.  He non-suited that action and re-filed it 
in the Circuit Court of Prince William County on March 8, 
2006. 
 
3
who was scheduled to meet with Schmidt and the Household 
Finance employees in order to notarize the loan documents 
failed to arrive at the restaurant, Schmidt explained that 
he needed to return to work.  The Household Finance 
employees, however, informed Schmidt that he had to sign 
the loan documents that day in order to receive the loan 
and that, if he would execute the documents, the notary 
public could sign them later.  Schmidt then executed the 
loan documents but never received copies of them, despite 
the employees’ promise to send the documents to Schmidt. 
In October 2004, Schmidt initiated steps to refinance 
the mortgage loan that he believed he had obtained from 
Household Finance.  The next month, while working with 
another lender, Schmidt learned for the first time that his 
mortgage loan was actually from a lending institution known 
as “MBNA,” not from Household Finance, and that the 
interest rate was several points higher than he had 
understood.  Schmidt also learned that the $17,467 he had 
paid to Household Finance did not represent prepaid finance 
charges but was for closing costs and fees.  According to 
Schmidt, he also discovered that Household Finance, by its 
agents, had forged Schmidt’s signature on loan documents 
and provided MBNA with false information regarding 
Schmidt’s income. 
 
4
Upon learning all this information, Schmidt refused to 
make further loan payments on the grounds that he had not 
agreed to the loan terms.  In November 2005, foreclosure 
proceedings were commenced against Schmidt’s residence.  
Schmidt then sold his residence, and he alleges that he 
received at least $100,000 less than he would have received 
if he had not sold the property to avoid the foreclosure 
proceedings. 
In Schmidt’s amended complaint naming only Household 
Finance as a defendant, he sought rescission of the written 
contract (Count I).  He alleged that the mortgage loan was 
unlawful because Household Finance was not licensed as a 
mortgage lender.  He further claimed that, “[b]ecause the 
loan . . . was illegal, [Household Finance] has no right to 
retain the money that it received from [Schmidt] in excess 
of the amount it lent to [Schmidt] and is obligated by 
natural justice and equity to refund the money to 
[Schmidt].”  Schmidt also alleged actual fraud (Count II) 
and constructive fraud (Count III), as well as violations 
of the VCPA (Count IV), the TILA (Count V), and the RESPA 
(Count VI).  In response, Household Finance filed, among 
other things, a demurrer to Counts I through IV of 
Schmidt’s amended complaint and a plea in bar of the 
 
5
applicable statutes of limitation to all the counts 
asserted in the amended complaint. 
Upon consideration of the parties’ memoranda and oral 
argument with regard to the demurrer and plea in bar, the 
circuit court made the following determination, as stated 
in the final order: “Count I – Demurrer sustained, Plea in 
Bar Denied.  Count II-VI – Demurrer is Denied, Plea in Bar 
is sustained.  The First Amended Complaint is Dismissed 
with Prejudice.”  We awarded Schmidt this appeal. 
III. ANALYSIS 
 
Schmidt assigns error to the circuit court’s judgment 
sustaining both Household Finance’s demurrer to his claim 
for rescission and the plea in bar with regard to the other 
claims.  We will first address the demurrer and then the 
plea in bar. 
A. Demurrer 
When reviewing a trial court’s judgment sustaining a 
demurrer, we determine only “whether a plaintiff’s factual 
allegations are sufficient to state a cause of action.”  
Almy v. Grisham, 273 Va. 68, 76, 639 S.E.2d 182, 186 
(2007); accord Faulknier v. Shafer, 264 Va. 210, 215, 563 
S.E.2d 755, 758 (2002).  Here, we must determine whether 
Schmidt’s factual allegations stated a cause of action for 
 
6
rescission against Household Finance.  We have previously 
explained that 
[o]ne of the first principles with respect 
to the rescission of a contract is that, in 
seeking a remedy which calls for the highest and 
most drastic exercise of the power of a court of 
chancery – to annul and set at naught the solemn 
contracts of parties – there must be first a 
sufficient averment of facts showing the 
plaintiff entitled in equity to the relief which 
he seeks, and satisfactory proof of these facts, 
to justify the interposition of the court; and in 
addition to all this the court must be able 
substantially to restore the parties to the 
position which they occupied before they entered 
into the contract. 
 
Bonsal v. Camp, 111 Va. 595, 599, 69 S.E. 978, 979 (1911); 
see also McLeskey v. Ocean Park Investors, Ltd., 242 Va. 
51, 54, 405 S.E.2d 846, 847 (1991) (“If rescission is 
granted, the contract is terminated for all purposes, and 
the parties are restored to the status quo ante.”). 
Schmidt argues that he was entitled to rescind the 
contract because the loan from Household Finance was 
illegal.  This is so, according to Schmidt, because 
Household Finance is not licensed as a mortgage lender in 
accordance with Code § 6.1-410.  Schmidt contends that 
illegality is one of the grounds for rescission and that he 
can, therefore, rescind the transaction and recover the 
money he paid to Household Finance.  Schmidt acknowledges 
that Household Finance was not a party to the mortgage 
 
7
loan.  He, nevertheless, argues that since Household 
Finance employees failed to disclose that the lender was 
MBNA, Household Finance is liable on the contract (and for 
rescinding it) on the theory that an agent for an 
undisclosed principal is liable, along with the principal, 
on the contract.  We do not agree. 
 
In his amended complaint, Schmidt captioned Count I as 
“RESCISSION OF WRITTEN CONTRACT,” but the only written 
contract alleged was the mortgage loan with MBNA.  Schmidt 
did not assert any contract to which he and Household 
Finance were parties.  Thus, Schmidt alleged no factual 
basis for a cause of action against Household Finance for 
rescission of a contract.2  Furthermore, Schmidt alleged 
that he had sold his residence and repaid the amount of the 
loan that he received.  These allegations show that the 
circuit court could not restore the parties to the 
respective positions they occupied before entering into the 
contract.  Bonsal, 111 Va. at 599, 69 S.E. at 979; see 
McLeskey, 242 Va. at 54, 405 S.E.2d at 847. 
                     
2  To have rescission of the contract actually alleged 
in the amended complaint, MBNA would be a necessary party 
to the proceeding, but Schmidt sought relief against only 
Household Finance.  See McDougle v. McDougle, 214 Va. 636, 
637-38, 203 S.E.2d 131, 133 (1974); Bonsal, 111 Va. at 600-
01, 69 S.E. at 980. 
 
8
Schmidt also argues that he asserted a cause of action 
for unjust enrichment in Count I and that the circuit court 
erred in sustaining Household Finance’s demurrer in regard 
to that theory of recovery.  In support of this argument, 
Schmidt points to his allegation asserting that, because 
the loan from Household Finance to Schmidt was illegal, 
Household Finance “has no right to retain the money that it 
received from [Schmidt] in excess of the amount it lent to 
[Schmidt] and is obligated by natural justice and equity to 
refund the money to [Schmidt].” 
To state a cause of action for unjust enrichment, 
Schmidt had to allege that: (1) he conferred a benefit on 
Household Finance; (2) Household Finance knew of the 
benefit and should reasonably have expected to repay 
Schmidt; and (3) Household Finance accepted or retained the 
benefit without paying for its value.  See Nedrich v. 
Jones, 245 Va. 465, 476, 429 S.E.2d 201, 207 (1993) (“One 
may not recover under a theory of implied contract simply 
by showing a benefit to the defendant, without adducing 
other facts to raise an implication that the defendant 
promised to pay the plaintiff for such benefit.” (citing 
Mullins v. Mingo Lime & Lumber Co., 176 Va. 44, 51, 10 
S.E.2d 492, 495 (1940))); see also Provident Life & 
Accident Ins. Co. v. Waller, 906 F.2d 985, 993-94 (4th Cir. 
 
9
1990).  Contrary to Schmidt’s argument, he did not plead 
sufficient factual allegations in his amended complaint to 
state a cause of action for unjust enrichment.  Thus, we 
conclude that the circuit court did not err in sustaining 
the demurrer to Count I. 
B. Plea in Bar 
 
The purpose of a plea in bar is to “reduc[e 
litigation] to a distinct issue of fact which, if proven, 
creates a bar to the plaintiff’s right of recovery.”  
Tomlin v. McKenzie, 251 Va. 478, 480, 468 S.E.2d 882, 884 
(1996).  Household Finance filed a plea in bar of the 
applicable statutes of limitation with regard to Schmidt’s 
causes of action alleging actual fraud and constructive 
fraud; and violations of the VCPA, TILA, and RESPA.  The 
statute of limitations for actual fraud and constructive 
fraud, as well as a VCPA violation, is two years.  Code 
§§ 8.01-243(A) and 59.1-204.1(A), respectively.  However, 
“[i]n actions for fraud or mistake, [or] in actions for 
violations of the Consumer Protection Act [the cause of 
action accrues] when such fraud, mistake, 
misrepresentation, deception, or undue influence is 
discovered or by the exercise of due diligence reasonably 
should have been discovered.”  Code § 8.01-249(1), see also 
STB Marketing Corp. v. Zolfaghari, 240 Va. 140, 144, 393 
 
10
S.E.2d 394, 397 (1990) (holding that a cause of action for 
fraud does not accrue until the plaintiff “knew or 
reasonably should have known of the fraud.”). 
As the party asserting the plea in bar, Household 
Finance had the burden of proving that the applicable 
statutes of limitation had run.  Lo v. Burke, 249 Va. 311, 
316, 455 S.E.2d 9, 12 (1995); see also Baker v. Poolservice 
Co., 272 Va. 677, 688, 636 S.E.2d 360, 366 (2006) (“The 
party asserting the plea in bar bears the burden of proof.” 
(citing Cooper Indus., Inc. v. Melendez, 260 Va. 578, 594, 
537 S.E.2d 580, 590 (2000))).  It is apparent on the face 
of Schmidt’s pleadings that the two-year statute of 
limitations had expired when he filed his initial, non-
suited action in the Circuit Court of Fairfax County in 
November 2005.  Schmidt executed the mortgage loan 
documents on February 28, 2002, more than two and one-half 
years before he first filed his action against Household 
Finance. 
Contrary to Schmidt’s argument, the burden then 
shifted to Schmidt to prove that, despite the exercise of 
due diligence, he could not have discovered the alleged 
fraud within the two-year period before he commenced the 
action in November 2005.  In other words, Household Finance 
did not have to show the lack of due diligence.  In Hughes 
 
11
v. Foley, 203 Va. 904, 907, 128 S.E.2d 261, 263 (1962), 
this Court stated: 
The authorities agree that where a statute 
. . . declares that a cause of action for the 
recovery of money paid under fraud or mistake is 
deemed to have accrued at the time such fraud or 
mistake is discovered, or by the exercise of due 
diligence ought to have been discovered, the 
burden is on the plaintiff to prove that he acted 
with due diligence and yet did not discover the 
fraud or mistake until within the statutory 
period of limitation immediately preceding the 
commencement of the action. 
 
As previously noted, the parties did not present 
evidence to the circuit court on the plea in bar.  Thus, 
the circuit court, as well as this Court, looks solely to 
the pleadings to determine whether Schmidt carried his 
burden of demonstrating that, even with the exercise of due 
diligence, he nonetheless could not have discovered the 
alleged fraud until November 2004 when he attempted to 
refinance what he believed was a mortgage loan from 
Household Finance.3  See Lostrangio, 261 Va. at 497, 544 
S.E.2d at 358. 
                     
3  We agree with Schmidt’s argument that he did not 
initially have to allege facts in his amended complaint to 
demonstrate that he timely filed his action within the two-
year period after he discovered or should have discovered 
Household Finance’s alleged fraud through the exercise of 
due diligence.  However, since he chose not to present 
evidence to the circuit court but, instead, submitted the 
due diligence issue on the pleadings, he is now limited to 
the factual allegations stated in his amended complaint.  
See Upper Occoquan Sewage Auth. v. Blake Constr. Co., 266 
 
12
This Court has defined due diligence as “ ‘[s]uch a 
measure of prudence, activity, or assiduity, as is properly 
to be expected from, and ordinarily exercised by, a 
reasonable and prudent man under the particular 
circumstances; not measured by any absolute standard, but 
depending on the relative facts of the special case.’ ”  
STB Marketing, 240 Va. at 144, 393 S.E.2d at 397 (quoting 
Blacks Law Dictionary 411 (rev. 5th ed. 1979)).  “Whether 
such due diligence has been exercised must be ascertained 
by an examination of the facts and circumstances unique to 
each case.”  Id. at 145, 393 S.E.2d at 397 (citing Mears v. 
Accomac Banking Co., 160 Va. 311, 323, 168 S.E. 740, 744 
(1933)). 
Accepting as true the facts stated in Schmidt’s 
amended complaint, see Niese, 264 Va. at 233, 564 S.E.2d at 
129, it is evident that he discovered Household Finance’s 
alleged fraud in November 2004 when he was attempting to 
refinance the mortgage loan on his residence.  However, 
Schmidt stated no facts demonstrating that, despite the 
exercise of due diligence, he could not have discovered the 
alleged fraud any sooner.  Yet, Schmidt alleged that he 
executed the loan documents in a restaurant and was advised 
                                                             
Va. 582, 585, 589, 587 S.E.2d 721, 722-23, 725 (2003) 
(reciting submission of 46 claims to a jury in a plea in 
 
13
that the notary public, who failed to appear, would execute 
the documents later.  Schmidt further alleged that he never 
received a copy of the loan documents although the 
Household Finance employees told him that copies would be 
sent to him.  Based on these facts, a reasonable and 
prudent person would suspect that something was amiss with 
regard to the mortgage loan.  But, Schmidt apparently made 
no follow-up inquiries about the mortgage loan. 
In STB Marketing, this Court held that a thorough 
examination of land records and foreclosure sale documents 
would not have apprised the plaintiff of the fraudulent 
acts at issue.  240 Va. at 144, 393 S.E.2d at 397.  Thus, 
we concluded that the plaintiff had no reason to believe 
that a conveyance of a second deed of trust and 
distribution of proceeds from a foreclosure sale were 
fraudulent until several years later when additional 
information was discovered.  Id. at 145, 393 S.E.2d at 397.  
In the present case, by contrast, the alleged events 
surrounding the execution of the mortgage loan documents 
were sufficient in and of themselves to put Schmidt on 
notice that, at a minimum, he needed to make further 
inquiry.  Thus, based on the facts alleged in Schmidt’s 
amended complaint, we conclude that Schmidt did not carry 
                                                             
bar hearing using special verdict forms). 
 
14
his burden to prove that he filed this action within two 
years of the time when, “by the exercise of due diligence[, 
the alleged fraud] reasonably should have been discovered.”  
Code § 8.01-249(1). 
Finally, we address the plea in bar of the statutes of 
limitation applicable to Schmidt’s causes of action 
alleging violations of TILA and RESPA.  The statute of 
limitations for a cause of action alleging a TILA violation 
is “one year from the date of the occurrence of the 
violation.”  15 U.S.C. § 1640(e) (2000 & Supp. V 2005).  
Similarly, a cause of action for the type of RESPA 
violation alleged by Schmidt must be commenced within one 
year of the violation.4  12 U.S.C. § 2614 (2000 & Supp. V 
2005). 
Schmidt, however, claims that the theory of equitable 
tolling applies and that, therefore, the applicable 
statutes of limitation do not bar his claims under either 
TILA or RESPA.5  Federal courts have determined that 
                     
4  12 U.S.C. § 2614 provides for a one-year statute of 
limitations for violations of §§ 2607 and 2608 and a three-
year statute of limitations for violations of § 2605. 
 
5  Federal courts have held that the applicable 
statutes of limitations for causes of action under both 
TILA and RESPA are subject to equitable tolling.  See 
Barnes v. West, Inc., 243 F. Supp. 2d 559, 561-62 (E.D. Va. 
2003); Ramadan v. Chase Manhattan Corp., 156 F.3d 499, 503-
04 (3rd Cir. 1998). 
 
15
equitable tolling is a remedy that should be applied 
sparingly, see Irwin v. Department of Veterans Affairs, 498 
U.S. 89, 96 (1990), English v. Pabst Brewing Co., 828 F.2d 
1047, 1049 (4th Cir. 1987), cert. denied, 486 U.S. 1044 
(1988), and equitable relief is available only when a 
defendant misled or deceived a plaintiff in order to 
prevent the plaintiff from either discovering the existence 
of a cause of action or filing a timely claim.  See Olson 
v. Mobil Oil Corp., 904 F.2d 198, 201 (4th Cir. 1990); 
English, 828 F.2d at 1049.  In Irwin, 498 U.S. at 96, the 
United States Supreme Court stated: 
We have allowed equitable tolling in situations 
where the claimant has actively pursued his 
judicial remedies by filing a defective pleading 
during the statutory period, or where the 
complainant has been induced or tricked by his 
adversary’s misconduct into allowing the filing 
deadline to pass.  We have generally been much 
less forgiving in receiving late filings where 
the claimant failed to exercise due diligence in 
preserving his legal rights. 
 
Schmidt acknowledges that, to receive the benefit of 
equitable tolling, a plaintiff has to establish that “‘(1) 
the party pleading the statute of limitations fraudulently 
concealed facts that are the basis of the plaintiff’s 
claim; (2) the plaintiff failed to discover those facts 
within the statutory period, despite (3) the exercise of 
due diligence.’”  Barnes v. West, Inc., 243 F. Supp. 2d 
 
16
 
17
559, 563 (E.D. Va. 2003) (citing Supermarket of Marlington, 
Inc. v. Meadow Gold Diaries, Inc., 71 F.3d 119, 122 (4th 
Cir. 1995)).  For the reasons already stated, the factual 
allegations in Schmidt’s amended complaint do not show 
that, despite the exercise of due diligence, he could not 
have discovered the facts forming the basis of his federal 
claims within the statutory limitation periods. 
Thus, we conclude that the circuit court did not err 
in sustaining Household Finance’s plea in bar of the 
statutes of limitation with regard to Schmidt’s causes of 
action for actual fraud and constructive fraud; and for 
violations of the VCPA, TILA, and RESPA. 
IV. CONCLUSION 
For the reasons stated, we will affirm the judgment of 
the circuit court. 
Affirmed.