Luxating patellas are usually genetic, but can also be caused by traumatic injury from jumping on and off furniture. Since she has been recuperating from surgery, I'm sure her patellas were slipping before. Your vet should have checked her knees early on.
To answer your question, yes, it has everything to do with the breeder. Both luxating patellas and Legg-Perthes are inherited conditions in Yorkies. If Chloe's breeder wasn't carefully screening for genetic problems and health testing the dogs she was breeding, conditions like these are passed on to puppies and then to their new owners. I suspect your niece wasn't careful who she bought a puppy from since she obviously didn't think the responsibility through.
Look under the paragraph "Genetic Defects":
Yorkshire Terrier - Wikipedia, the free encyclopedia
Thank heavens Chloe has you to take care of her. It sounds like the poor thing will need another surgery.