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
2
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
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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
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.
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