Keystone Custom Homes v. Zuke, B.

J-A04006-22
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
KEYSTONE CUSTOM HOMES, INC. : IN THE SUPERIOR COURT OF
AND WILLOW CREEK, LLC : PENNSYLVANIA
:
Appellants :
:
:
v. :
:
: No. 637 EDA 2021
BRADLEY A. ZUKE, ESQUIRE AND :
APPEL & YOST, LLP :
:
:
WILMER AND JOYCE HOSTETTER, :
H/W :
v. :
:
:
BRADLEY A. ZUKE, ESQUIRE AND :
APPEL & YOST, LLP
Appeal from the Order Entered March 5, 2021
In the Court of Common Pleas of Chester County Civil Division at No(s):
No. 2015-07661-PL
BEFORE: LAZARUS, J., NICHOLS, J., and McLAUGHLIN, J.
MEMORANDUM BY LAZARUS, J.: FILED JULY 15, 2022
Keystone Custom Homes, Inc., and Willow Creek, LLC, (collectively,
Plaintiffs) appeal from the order denying their post-verdict motions, following
the entry of judgment in favor of Appellees/Defendants, Appel & Yost, LLP,
and Bradley Zuke, in consolidated legal malpractice actions that arises from
Zuke’s preparation of a public offering statement (POS) for a planned
community. After careful review, we affirm.
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Keystone is a Pennsylvania corporation, headquartered in Lancaster,
Pennsylvania, that purchases and develops real estate and constructs homes
in southern Chester County. In 2002, Wilmer and Joyce Hostetter (the
Hostetters) purchased a 65-acre parcel of land located in East Nottingham
Township, Oxford, Chester County, with the intention of developing the
property into lots for a residential subdivision. On April 15, 2003, the
Hostetters entered into a contract to sell Keystone the individual lots after the
Hostetters developed the land and obtained subdivision approval. Keystone’s
affiliate, Willow Creek, LLC,1 intended to buy and sell the lots to third parties,
while Keystone planned to construct the residences, and market and sell the
homes. The subdivision, Hopewell Ridge (Community), is a planned
community2 that consists of 29 one-acre lots.
The Hostetters developed the infrastructure for the subdivision and
finished the lots; they planned to have all 29 lots serviced by on-lot sewage
disposal and private on-lot water wells. In 2002, the Hostetters applied for a
sewage permit with Chester County Health Department, had the necessary
soil testing completed, and applied for on-lot sewage disposal. However, in
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1The trial court found as a fact that Keystone and Willow Creek are separate
and distinct legal entities that maintain separate financial books and records
and separate financial transactions. See Trial Court Opinion, Finding of Fact
#6, 12/18/20, at 2.
2 The Community was developed as a planned community under the
Pennsylvania Uniform Planned Community Act (PUPCA), 68 Pa.C.S.A. § 5101,
et seq.
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2004, following a hydrogeological evaluation of the Community, the Hostetters
learned that 20 of the 29 lots contained groundwater with a nitrate-nitrogen
concentration that exceeded the acceptable limits of the Pennsylvania
Department of Environmental Protection (DEP).3 To remedy the wastewater
issue for those 20 lots, the Hostetters chose to use experimental septic
systems known as EnviroServers4—on-site, small-flow septic systems that
treat sewage in an effort to reduce nitrates in the groundwater. While the
DEP approved a revision to the Township Official Sewage Facilities Plan for the
Community, the DEP noted that it “consider[ed] the EnviroServer[s] to be
experimental technology for this use. Therefore, a conventional backup
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3 Due to the lot sizes, the normal on-lot sewage disposal systems were not
feasible because the nitrates passing the property boundaries would exceed
the limit of 10 parts per million (PPM). Because the Hostetters had already
received township planning commission recommendations for final plan
approval, with minimum lot sizes of one-acre each, the Hostetters were not
able to increase the lot sizes to remedy the nitrate-soil issue.
4 EnviroServers use a seven-stage process to treat the effluent. Initially,
wastewater is gravity fed into a compartment where the sludge and solids are
settled. Then, in the second stage, the wastewater is aerated using a low-
pressure air compressor and diffuser; aeration promotes the growth of
microorganisms, which convert and remove biodegradable organic matter. In
the third stage, nitrification occurs and microorganisms are converted from
ammonia to nitrates using oxygen. In the fourth stage, the treated
wastewater is clarified and solids are settled. Next, in stage five, the carbon
in the recirculated wastewater promotes nitrogen to be released as a gas. In
stage six, solids are removed from the water. Finally, in stage seven, the
clarified water leaves the treatment compartments through a filter and the
effluent is ready for discharge. See
https://www.nexgenseptics.com/product/enviroserver/ (last visited on
6/2/22).
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sewage disposal method is required. The D[EP] acknowledges that the
subdivision will be connected to public sewage facilities tributary to the Oxford
Area Sewer Authority, in the event the experiment is deemed a failure.” DEP
Letter, 11/23/05.5
The Hostetters retained counsel to prepare the bylaws of the
Community’s Homeowners Association (HOA). In February 2006, the
Hostetters issued a declaration for the Community, which lists the Hostetters
as the owner of the Community. The declaration disclosed information to
potential purchasers regarding the operation, maintenance, and repair of the
EnviroServers, as well as the proposed costs related to the system.
Specifically, the HOA declaration stated that the HOA would be responsible for
the maintenance, repair, and replacement of small-flow sewage treatment and
disposal systems and on-lot systems in the development. Third-party
companies performed the installation, maintenance, repairs, and monitoring
of the EnviroServers. During the construction of the homes, Keystone
discovered issues with the EnviroServers.
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5 A sewer permit, also issued by the DEP, contained the following conditions
regarding the Community: conventional back-up contingency should
EnviroServers be unable to meet discharge limits and municipality to be
provided with bond, escrow account, or bank letter of credit, which would be
forfeited upon notice by DEP of noncompliance with permit.
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In 2007, Keystone retained Defendants6 to prepare a POS for the
Community, a requirement under the PUPCA.7 Defendants verbally agreed to
prepare the POS; Keystone intended to provide the POS to prospective
purchasers of the subdivision homes. From February 2007 through 2010,
Keystone distributed the POS, providing copies to all purchasers and
prospective home purchasers. The POS listed the Hostetters and Keystone as
the sellers of the real estate; it did not disclose the existence or role of Willow
Creek with regard to the Community.
In April 2008, the DEP conducted an inspection of the Community’s
sewage systems, noting the following areas of concern: erosion problems
resulting in oil deposits impacting treatment units and field drains;
unauthorized access to treatment units; and improper removal of alkalinity
from water, which is essential for treatment process. In July 2008, the DEP
notified Hostetter that samples of the influent and effluent associated with the
EnviroServers were not consistently meeting the Mg/L effluent limit of total
nitrogen as required by the permit.
Homeowners became dissatisfied with the third-party companies
involved with the operation of the EnviroServers and, during the course of an
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6 At the time, Defendant Bradley A. Zuke, Esquire, was an employee of and
practicing law for Defendant Appel & Yost. Attorney Zuke prepared the POS
for Keystone.
7 Under the PUPCA, an owner or developer of land being developed and sold
for residential use as a “planned community” is required to provide a public
offering statement describing information and features of the property and
proposed development. 68 Pa.C.S.A. §§ 5402-5405.
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investigation, learned that the EnviroServers were being used at the
Community due to the elevated level of nitrates in the Community’s
groundwater. In 2011, the Community homeowners reviewed the portion of
the POS discussing the EnviroServers. First, the POS incorrectly listed
Keystone as the seller of the homes. Second, the POS identified the Hostetters
as the “sole Declarants” who were the “developers” of the Community.8 Third,
the POS stated that the Community is to be serviced by public water; it did
not disclose that there were elevated levels of nitrates in the Community’s
groundwater. Despite the language in the POS, Keystone did not provide
public water to the Community. Instead, Keystone provided potable water to
each home using private well water, and utilized “Reverse Osmosis” water
treatment systems to those homes where the level of nitrates in the wells
exceeded applicable environmental limits. Keystone obtained permits from
the Chester County Health Department certifying the wells to provide public
water to the Community homes, save those that needed a treatment system.
In February 2012, the DEP notified the HOA that the existing septic
systems for 20 of the properties were noncompliant and required the HOA to
provide a description of the steps necessary to implement the backup sewer
contingency plan proposed by the Plaintiffs in conjunction with their permit
request. The DEP notified the Hostetters and East Nottingham Township that,
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8 The Purchase Agreement section of the POS states that the “the Declarant
[the Hostetters] and Keystone [] will construct and sell the homes within the
Community.”
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in light of the EnviroServers’ continued noncompliance with the nitrogen limit
in the Community’s sewage permit, public sewers must be extended to serve
the Community, at an estimated cost in excess of $10,000,000.00.
In August 2013, the Community homeowners filed a lawsuit
(Homeowners litigation/Barker) in federal court against Keystone, Willow
Creek, and the Hostetters (Homeowner Litigation-defendants) seeking
damages in the form of loss of value and marketability of their homes and
expenses related to nitrates in their water. The homeowners alleged that they
incurred damages as a result of Homeowner Litigation-defendants withholding
material information from them, misrepresenting facts about the Community’s
sewage systems and water supply (i.e., failure to disclose the elevated level
of nitrates in the Community’s groundwater), failing to properly monitor the
EnviroServers, and failing to provide public water to the Community as per
the POS. See Barker, et al. v. Hostetter, et al., No. 13-5081 (E.D. Pa.
2013). Specifically, in the complaint, Homeowners allege that “Hostetter and
Keystone had long been aware that serious issues existed with the feasibility
of using on[-]lot sewage systems and private on-lot wells” and that because
“20 of the 29 lots in Hopewell Ridge were unsuitable for standard septic
systems due to ‘groundwater nitrogen plum[e] migration off-site[,] a workable
solution proposes the use of individual on-lot nitrogen control treatment
systems on those 20 lots.’” Homeowner’s Complaint, 8/29/13, at ¶¶ 35, 37.
On March 27, 2017, the parties entered into a settlement agreement in
Barker, whereby Homeowner-defendants agreed to: pay each homeowner
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$25,000; pay $25,000 to fund the Community’s HOA; inspect, service and
maintain the EnviroServers septic systems for two years; take all steps to
obtain an amended Wastewater Management Permit from the DEP; and, at
Keystone’s expense, install public water service to every home in the
Community. See id. at *4. Homeowner-defendants also agreed to pay
“reasonable attorneys[’] fees and litigation expenses incurred by [Plaintiffs],
the reasonable amount of which shall be mediated[.]” Id. When the parties
were unable to agree on the amount of attorneys’ fees to be awarded, the fee
dispute was referred by a magistrate for binding arbitration to the U.S. District
Court. The district court ultimately granted Plaintiffs’ attorneys’ fees in the
amount of $1,647,695.41, as well as an additional $100,000 in costs. See id.
at *2.9
After the commencement of the Homeowner litigation, Keystone
reviewed the POS and realized that Defendants had made several errors in
the POS, including statements that: (1) public water will be available to all
lots in the Community; (2) public water lines will be dedicated; (3) the
Community will be subject to utility easements for water; and (4) the
Hostetters warranted that the water line will be free from defects for one year.
Keystone also realized that Defendants had failed to disclose in the POS that
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9The United States Court of Appeals for the Third Circuit affirmed the District
Court’s decision to refuse to retain jurisdiction over the parties’ settlement
agreement after the case was dismissed. See Barker v. Hostetter, No. 17-
3760 (3d Cir. Pa. 2019) (noting if parties do not satisfy clear terms of
settlement agreement, plaintiffs may initiate new action to seek enforcement).
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there were elevated levels of nitrates in the Community groundwater that was
being treated.
Plaintiffs instituted the instant action against Defendants by filing a
praecipe for a writ of summons on August 26, 2015. Plaintiffs alleged that,
as a result of Defendants’ malpractice, they were sued in federal court by the
Community homeowners and incurred significant damages in the form of
attorneys’ fees and settlement funds. The Hostetters also filed a similar
lawsuit against Defendants. On April 26, 2016, the trial court, upon motion,
consolidated the two cases.10 On March 20, 2017, Plaintiffs filed a complaint
against Defendants. On April 7, 2017, Defendants filed preliminary objections
to the complaint. On April 26, 2017, Plaintiffs filed an amended complaint
against Defendants, raising the following claims: legal malpractice (Count I),
equitable disgorgement of fees (Count II), breach of contract (Count III),
negligence (Count IV), and indemnification (Count V). The court overruled,
as moot, Defendants’ preliminary objections. Defendants filed an answer and
new matter to the amended complaint. Plaintiffs filed a reply to new matter.
On March 15, 2018, Defendants filed a motion for summary judgment;
Plaintiffs filed a response to the motion on April 16, 2018. On June 19, 2018,
the trial court denied the motion for summary judgment. Defendants then
filed a motion for reconsideration, requesting the court reverse its order
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10Cases Nos. 2015-0766 & 20105-07708 were consolidated under case No.
2015-07661. The Hostetters are not parties to the present appeal.
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denying summary judgment because Plaintiffs’ claims are time-barred. The
court denied the reconsideration motion on July 23, 2018.
A 35-day bench trial commenced on January 28, 2019, and concluded
on March 6, 2020. At the end of Plaintiffs’ case, Defendants moved for
nonsuit, which the trial court granted as to Plaintiffs’ negligence and breach
of contract claims. The court concluded that Plaintiffs did not offer sufficient
evidence to establish that Appel & Yost failed to fulfill any instructions or
contractual terms. The court also determined that the gist of Plaintiffs’ action
sounded in tort, not contract.11 During oral argument on the motion for
nonsuit, Plaintiffs orally withdrew their claim for equitable disgorgement.
Thus, trial proceeded solely on Plaintiffs’ claims for legal malpractice and
common law indemnification.
On December 18, 2020, the trial court entered an order granting
judgment in favor of Defendants and against Plaintiffs. The trial court
determined that, under the “occurrence rule,” the statute of limitations on
Plaintiffs’ legal malpractice claim began to run in 2007, when Defendants
breached their duty of care in failing to exercise reasonable care in the
preparation of the POS. Thus, because Plaintiffs did not initiate their claim
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11 See Bruno v. Erie Ins. Co., 106 A.3d 48, 68-70 (Pa. 2014) (“[A]
negligence claim based on the actions of a contracting party in performing
contractual obligations is not viewed as an action on the underlying contract
itself, [but] . . . the contract is regarded merely as the vehicle, or mechanism,
which established the relationship between the parties, during which the tort
of negligence was committed.”).
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until August 26, 2015, more than two years after Defendants’ alleged breach,
the action was time-barred.12
Plaintiffs filed timely post-trial motions. Following oral argument, the
court denied the motions on March 5, 2021. Plaintiffs filed a timely notice of
appeal and court-ordered Pa.R.A.P. 1925(b) concise statement of errors
complained of on appeal. Plaintiffs raise the following issues for our
consideration:
(1) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it held that a client is precluded
as a matter of law from obtaining damages for legal
malpractice [when] the client was not aware for years of an
attorney’s breach of duty of care in the preparation of a legal
document because there is no requirement under
Pennsylvania law that the client review the attorney’s work
for accuracy and the client did not do so because the client
relied upon the attorney’s work.
(2) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it failed to conclude that the
attorney’s negligence was the proximate cause of the
client’s substantial liability in litigation arising directly from
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12 Moreover, the court noted that even if Plaintiffs’ claims were not time-
barred, Plaintiffs had failed to demonstrate that Defendants had a duty where
the attorney-client relationship was solely between the Defendants and
Keystone, not Willow Creek. Additionally, the court determined that Willow
Creek was not an intended third-party beneficiary of Keystone’s attorney-
client relationship. Finally, the court found that while Defendants failed to
exercise reasonable care with regard to preparing portions of the POS,
Keystone failed to demonstrate proximate cause—i.e., that the errors from
Defendants’ lack of care were the proximate cause of Keystone’s damages.
Specifically, the trial court was not convinced that even if the POS been
properly prepared by Defendants, that the homeowners would still not have
instituted the federal lawsuit.
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the attorney’s error, which error forced the client to settle
that litigation in order to mitigate the client’s damages.
(3) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it failed to conclude that two
companies which retained and paid for the services of an
attorney were clients of the attorney to whom the attorney
had a duty to prepare a legally compliant P[OS.]
(4) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it failed to conclude that the
attorney’s negligence was the proximate cause of the
client’s substantial liability in litigation arising directly from
the attorney’s error, which error forced the client to settle
that litigation in order to mitigate the client’s damages.
(5) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it failed to find in favor of the
client on the client’s indemnification claim and conclude that
the client’s liability in litigation resulting from the attorney’s
error was the result of the attorney’s undisputed negligence.
(6) Whether the [trial c]ourt erred as a matter of law and/or
abused its discretion when it failed to conclude that a client
can maintain a breach of contract claim against an attorney
despite undisputed record evidence of the attorney’s failure
to prepare a legally compliant public offering statement as
required by the parties’ contract which resulted in damages
to the client as demonstrated at trial.
Appellants’ Brief, at 6-8.
In Pennsylvania, courts apply the occurrence and discovery rules when
assessing the statute of limitations in a legal malpractice action. Glenbrook
Leasing Co. v. Beausang, 839 A.2d 437, 442 (Pa. Super. 2003).
The trigger for the accrual of a legal malpractice action, for statute
of limitations purposes, is not the realization of actual loss, but
the occurrence of a breach of duty. Pennsylvania law provides
that:
the occurrence rule is used to determine when the statute
of limitations begins to run in a legal malpractice action.
Under the occurrence rule, the statutory period commences
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upon the happening of the alleged breach of duty. An
exception to this rule is the equitable discovery rule which
will be applied when the injured party is unable, despite the
exercise of due diligence, to know of the injury or its cause.
Pocono [Int’l] Raceway v. Pocono Produce, Inc., []
468 A.2d 468, 471 ([Pa.] 1983). Lack of knowledge,
mistake[,] or misunderstanding[] will not toll the running of
the statute. Id. [] 468 A.2d at 471.
Pennsylvania favors strict application of the statutes of limitation.
Accordingly, the statute of limitations in a legal malpractice claim
begins to run when the attorney breaches his or her duty, and is
tolled only when the client, despite the exercise of due diligence,
cannot discover the injury or its cause.
Communications Network Int’l. v. Mullineaux, 187 A.3d 951, 960-61 (Pa.
Super. 2018) (citation omitted) (emphasis omitted). See also Dalrymple v.
Brown, 701 A.2d 164, 223 (Pa. 1997) (discovery rule “provides that where
the existence of the injury is not known to the complaining party and such
knowledge cannot reasonably be ascertained within the prescribed statutory
period, the limitations period does not begin to run until the discovery of the
injury is reasonably possible”).
Instantly, the trial court found that, under the occurrence rule, Plaintiffs’
legal malpractice claim began to run in February 2007, “when Attorney Zuke,
on behalf of Appel & Yost, prepared and forwarded to Keystone [] its error[-
]filled POS.” Trial Court Opinion, 12/18/20, at 56. Plaintiffs argue on appeal,
however, that under the discovery rule their cause of action against
Defendants did not accrue until August 29, 2013, when the homeowners
instituted the federal action, because it was at this moment that “Keystone’s
damages became ‘identifiable’ and more than just potential future harm.”
Appellants’ Brief, at 48.
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An action for legal malpractice may be brought in either contract
or tort. The elements of a legal malpractice action, sounding in
negligence, include: (1) employment of the attorney or other
basis for a duty; (2) failure of the attorney to exercise ordinary
skill and knowledge; and (3) that such failure was the proximate
cause of the harm to the plaintiff.
* * *
[I]t is undisputed that the two-year limitations period applies to
the negligence claim and the four-year limitations period applies
to the breach of contract claim.
Wachovia Bank, N.A. v. Ferretti, 935 A.2d 565, 570-71 (Pa. Super. 2007).
“An attorney will be deemed ‘negligent’ if he or she fails to possess and
exercise that degree of knowledge, skill and care [that] would normally be
exercised by members of the profession under the same or similar
circumstances.” Fiorentino v. Rapoport, 693 A.2d 208, 213 (Pa. Super.
1997). See Wachovia, supra at 571 (“With regard to a breach of contract
claim, an attorney who agrees for a fee to represent a client is by implication
agreeing to provide that client with professional services consistent with those
expected of the profession at large.”).
In Wachovia, the appellant similarly argued that a plaintiff must suffer
“actual loss” before the statute of limitations is triggered in a legal malpractice
action. On appeal, our Court reiterated that “the trigger for the accrual of a
legal malpractice action, for statute of limitations purposes, is not the
realization of actual loss, but the occurrence of a breach of duty.” Id. at 573.
Moreover, the statute of limitations “is tolled only until the injured party should
reasonably have learned of the breach.” Id. at 574. Thus, the question in
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the instant case is: when should Plaintiffs have reasonably learned of
Defendants’ breach?
Here, the trial court concluded that, even as non-lawyers, Plaintiffs could
have learned of Defendants’ breach by exercising reasonable diligence in
reviewing the POS when Defendants provided it to Plaintiffs in February 2007.
Trial Court Opinion, 12/18/20, at 57. Specifically, the court found that, at a
minimum, Plaintiffs would have reasonably discovered the erroneous
statements in the POS that the Community would be serviced by public water
and not, as Keystone and the Hostetters planned, on-site wells and septic
systems.
Moreover, the trial court noted that Plaintiffs were clearly on notice of
the Community homeowners’ frustration and dissatisfaction with the use of
the EnviroServers systems at a HOA Executive Board meeting in October
2011. See Appellants’ Brief, at 47 (Plaintiffs acknowledging that their
representative, Ms. Frame, attended meeting where there “was a discussion
about a reference to public water in the POS”). Finally, Plaintiffs should have
been on notice of Defendants’ breach in February 2012, when the DEP notified
the Hostetters and East Nottingham Township that the EnviroServers were
consistently noncompliant and that they needed to switch to public sewers.
See Fine v. Checcio, 870 A.2d 850, 858-59 (Pa. 2005) (with regard to
plaintiff exercising reasonable diligence in investigating cause of action in legal
malpractice action, “the question in any given case is . . . what might he have
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known, by the use of the means of information within his reach, with the
vigilance the law requires of him?”).
Because Plaintiffs could have reasonably known about Defendants’
breach of duty more than two years from the date that they filed the instant
lawsuit, regardless of whether damages were speculative at that point, we
agree with the trial court that the statute of limitations expired on Plaintiffs’
legal malpractice claim and, thus, judgment was properly entered in favor of
Defendants. Communications Network Int’l., supra; Wachovia, supra.Order affirmed.13
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 7/15/2022
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13 Having concluded that Plaintiffs’ action is time-barred by the statute of
limitations, we need not address Plaintiffs’ remaining issues concerning
whether Defendants were negligent.
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