Keystone Custom Homes, Inc. and Willow Creek, LLC appeal a court order denying their post-verdict motions in a legal malpractice case against Appel Yost, LLP and attorney Bradley Zuke. The case arose from Zuke's preparation of a public offering statement (POS) for the Hopewell Ridge planned community, which consists of 29 one-acre residential lots in Chester County. The Hostetters purchased the land in 2002 with plans for subdivision development and entered a contract to sell the lots to Keystone after obtaining subdivision approval. The Hostetters faced groundwater contamination issues, leading them to propose the use of experimental septic systems (EnviroServers) for 20 of the lots, which the Pennsylvania Department of Environmental Protection (DEP) approved with conditions, necessitating a backup sewage disposal method. The Hostetters prepared a Homeowners Association (HOA) declaration outlining maintenance responsibilities for the sewage systems. In 2007, Keystone retained the Defendants to prepare the required POS for potential homebuyers, following which issues with the EnviroServers were discovered. The court ultimately affirmed the judgment in favor of the Defendants.
From February 2007 to 2010, Keystone distributed a Public Offering Statement (POS) to home purchasers, identifying itself and the Hostetters as sellers but failing to mention Willow Creek's involvement. An April 2008 inspection by the Department of Environmental Protection (DEP) revealed significant issues with the Community’s sewage systems, including erosion, unauthorized access, and improper water treatment. In July 2008, the DEP informed Hostetter that nitrogen levels in the influent and effluent from EnviroServers did not meet permit requirements. Homeowners later discovered that EnviroServers were used due to high nitrate levels in groundwater, and in 2011, they identified inaccuracies in the POS, including the misrepresentation of Keystone as the seller and the lack of disclosure about nitrate contamination and water supply issues. Keystone provided private well water instead of the promised public water and employed reverse osmosis systems for high-nitrate wells. In February 2012, the DEP notified the homeowners’ association (HOA) of noncompliance with septic systems for 20 properties, necessitating a backup sewer plan. The DEP also mandated the extension of public sewers due to ongoing nitrogen permit violations, estimating costs over $10 million. In August 2013, Community homeowners filed a federal lawsuit against Keystone, Willow Creek, and the Hostetters, claiming damages for loss of property value and expenses related to nitrate contamination. They alleged that the defendants withheld critical information about sewage systems and water supply, misrepresenting conditions in the Community. The complaint asserted that the defendants were aware of significant issues with on-lot sewage systems and the unsuitability of many lots for standard septic systems.
On March 27, 2017, a settlement agreement was reached in Barker, where Homeowner-defendants committed to pay $25,000 to each homeowner and an additional $25,000 to the Community's HOA. They also agreed to maintain the EnviroServers septic systems for two years, secure an amended Wastewater Management Permit from the DEP, and install public water service to every home, covered by Keystone's expenses. The defendants were also responsible for covering reasonable attorneys' fees and litigation expenses for the Plaintiffs, with the specific amount to be mediated. Following disputes over fees, a magistrate referred the case to arbitration, resulting in the district court awarding Plaintiffs $1,647,695.41 in attorneys' fees and $100,000 in costs.
Keystone later identified errors in the public offering statement (POS) made by the Defendants, which included false claims regarding public water availability and undisclosed elevated nitrate levels in the community's groundwater. Plaintiffs initiated legal action against Defendants on August 26, 2015, alleging malpractice that led to significant damages from a federal lawsuit by community homeowners. The Hostetters also filed a similar suit, leading to consolidation of the cases.
On March 20, 2017, Plaintiffs filed a formal complaint against Defendants, who responded with preliminary objections that were later overruled. Plaintiffs amended their complaint on April 26, 2017, alleging legal malpractice, equitable disgorgement, breach of contract, negligence, and indemnification. Defendants’ summary judgment motion was denied on June 19, 2018, and their subsequent motion for reconsideration was denied on July 23, 2018. A 35-day bench trial began on January 28, 2019, concluding on March 6, 2020.
At trial's end, a motion for nonsuit was granted for negligence and breach of contract claims due to insufficient evidence. Plaintiffs withdrew their equitable disgorgement claim, leaving legal malpractice and indemnification claims. On December 18, 2020, the trial court ruled in favor of Defendants, concluding that the statute of limitations for the legal malpractice claim began in 2007, upon Defendants' breach of duty in preparing the POS.
Plaintiffs' legal malpractice claim was deemed time-barred because they did not initiate the action until August 26, 2015, more than two years after the alleged breach by the Defendants. Although Plaintiffs filed timely post-trial motions, the court denied these motions on March 5, 2021. Subsequently, they filed a notice of appeal along with a concise statement of errors under Pa.R.A.P. 1925(b). The issues raised for appeal include whether the trial court erred in ruling that:
1. A client is precluded from recovering damages for legal malpractice due to lack of awareness of an attorney's breach, as Pennsylvania law does not require clients to review an attorney's work.
2. The court failed to recognize the attorney's negligence as the proximate cause of the client's substantial liability, which necessitated settlement to mitigate damages.
3. Two companies that retained and paid for the attorney's services were clients entitled to a legally compliant public offering statement.
4. The court did not find in favor of the client on the indemnification claim, asserting the attorney's undisputed negligence led to the client's liability.
5. A client can maintain a breach of contract claim against an attorney despite evidence of the attorney's failure to prepare a compliant public offering statement, which resulted in damages.
In Pennsylvania, the statute of limitations for legal malpractice claims begins when the breach occurs, not when the client realizes the loss. The occurrence rule applies, where the limitation period starts upon the breach, with the equitable discovery rule as an exception for cases where the client, despite due diligence, cannot discover the injury or its cause. However, lack of knowledge or misunderstanding does not extend the statute of limitations, which Pennsylvania courts strictly enforce.
In Communications Network Int’l. v. Mullineaux, the Pennsylvania Superior Court addressed the application of the discovery rule in legal malpractice claims. The court explained that the limitations period for such claims does not begin until the plaintiff discovers, or reasonably should have discovered, the injury. The trial court initially ruled that the plaintiffs' claim started in February 2007 when an attorney sent an erroneous document, but the plaintiffs contended that their claim did not accrue until August 29, 2013, when tangible damages became apparent due to a federal action by homeowners.
Legal malpractice can be pursued in contract or tort, with the negligence claim subject to a two-year statute of limitations and breach of contract claims to a four-year period. The elements of negligence include attorney-client employment, failure to provide ordinary skill and knowledge, and that this failure caused harm. The court noted that negligence is determined by the standard of care expected within the profession.
The appellate court referenced a prior case indicating that the statute of limitations is triggered by a breach of duty, not by actual loss. The key issue was when the plaintiffs should have reasonably discovered the defendants' breach. The trial court concluded that the plaintiffs could have identified the breach through reasonable diligence shortly after receiving the document in 2007, given the evident errors regarding water service and subsequent homeowner complaints about a system's noncompliance.
Ultimately, the court affirmed the trial court's decision, ruling that the statute of limitations had expired on the plaintiffs' claim, and therefore, the judgment in favor of the defendants was upheld. The court did not need to address other issues related to the defendants' alleged negligence.
