Schmidt v. Household Finance Corp., II

Decision Date06 June 2008
Docket NumberRecord No. 071292.
Citation276 Va. 108,661 S.E.2d 834
PartiesHarald SCHMIDT v. HOUSEHOLD FINANCE CORPORATION, II, d/b/a Household Finance Corp. of Virginia.
CourtVirginia Supreme Court

Ernest P. Francis, Arlington, for appellant.

Robert R. Musick (Dewey B. Morris, Robert A. Dybing, Thompson McMullan, on brief), Richmond, for appellee.



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.


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 facts stated in the plaintiff's pleadings for purposes of resolving the plea in bar. See id.


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 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.

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 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.


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 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 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.

Schmidt also argues that he asserted a cause of action for unjust enrichment in Count I and that the circuit court erred in sustaining...

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