Court Opinion

ID: 6500364
Source: CourtListenerOpinion
Date Created: 2022-07-15 16:08:44.029916+00
Date Added: 2024-06-11T09:19:35.270209
License: Public Domain

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37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).

                                           -3-
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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.

____________________________________________

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
____________________________________________

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,

____________________________________________

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

____________________________________________

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).

                                           -8-
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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

____________________________________________

10Cases Nos. 2015-0766 & 20105-07708 were consolidated under case No.
2015-07661. The Hostetters are not parties to the present appeal.

                                           -9-
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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

____________________________________________

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

____________________________________________

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

____________________________________________

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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