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A private corrections company seeks to hold Locke Liddell & Sapp liable for more than $5 million that’s allegedly missing from an account set up for a land deal. Houston-based Cornell Companies Inc. sued Locke Liddell and David Montgomery, a partner in the firm, alleging malpractice, among other things. The company filed Cornell Companies Inc. v. Locke Liddell & Sapp, et al. on Aug. 26 in Houston’s 333rd District Court. In its petition, Cornell alleges that the defendants “dropped the ball” by failing to ensure that a proper escrow account was set up in 2003 to hold the company’s funds. Those funds were intended to be used to buy land in Colorado on which to develop a regional correctional rehabilitation center. As alleged in the petition, the defendants gave Cornell the “green light” to wire almost $13 million into an account that was purported to be an escrow account. “There was no escrow agent; there was no escrow account,” alleges Scott Hershman, one of the attorneys representing Cornell. Cornell alleges in the petition that it is out not only the $5 million taken from the account, but also millions of dollars more in fees, expenses and transaction costs incurred in pursuing the missing money and finalizing the land deal with the representation of another attorney. The company asserts claims for malpractice, breach of contract, breach of fiduciary duty and fraud. The petition does not identify those who allegedly took Cornell’s money. John McElhaney, of counsel at Locke Liddell in Dallas, is the firm’s designated spokesman for this suit. He says the firm will contest all allegations of negligence on its part as well as allegations that it failed to act appropriately. “There is no doubt that we will contest the validity of the lawsuit,” McElhaney says. McElhaney says Locke Liddell was representing Cornell in other matters when the company sued the firm. “They just filed this thing without any notice to us,” he says. Montgomery, who initially represented Cornell in the land purchase, declines comment about the suit and refers questions to McElhaney. “We have a great deal of confidence in David Montgomery,” McElhaney says, but he declines further comment. McElhaney says David Beck and Eric Nichols, partners in Houston’s Beck, Redden & Secrest, represent Locke Liddell and Montgomery in the suit. Beck did not return a telephone call seeking comment by presstime on Sept. 15. The suit against Locke Liddell is related to a suit that a Cornell subsidiary filed last year in the Superior Court of Fulton County in Atlanta. Cornell alleged in its second amended complaint in Cornell Corrections of California Inc. v. Longboat Global Advisors, et al. that attorney Edgar J. Beaudreault of Roswell, Ga., a defendant in the suit, handled the construction loan transaction on behalf of Longboat, which was providing financing for the corrections facility project. Cornell Corrections alleged in the Georgia complaint that Beaudreault, who is also Longboat’s vice president and managing director, arranged for the escrow account but it turned out to be a regular bank account. Cornell Corrections further alleged in the complaint that, although the company wired the funds to Bank of America in August 2003, it didn’t learn until November of that year that the bank was not holding money in escrow and that a withdrawal never authorized by Cornell Corrections had been made. In the Georgia suit, Cornell Corrections asserted causes of action alleging fraud, conversion and breach of contract, among other legal theories. In December 2004, a jury awarded Cornell Corrections almost $6.5 million in actual damages and more than $1.4 million in punitive damages. The jury awarded damages on the breach of contract claim against Longboat and Beaudreault and awarded damages on the fraud claim against four defendants, including Beaudreault. However, the jury found for Longboat on the fraud claim. The jury also awarded damages against four defendants, including Longboat and Beaudreault, on Cornell Corrections’ claim that they arranged for the transfer of the company’s funds. Atlanta attorney Nolan Leake, a partner in King & Spalding and Cornell Corrections’ attorney in the Georgia case, says a defense motion for a new trial is pending before the Superior Court. Leake declines further comment. Richard A. Mitchell, Longboat’s attorney and a partner in Arnall Golden Gregory in Atlanta, declines comment, as does Beaudreault, who represents himself in the case. The five defendants in the Georgia suit all deny the allegations. TROUBLE COLLECTING? Hershman, a partner in Lackey Hershman in Dallas, says he doesn’t expect Cornell Corrections will be able to collect the damages awarded in the Georgia case, because he thinks the money is gone. In its petition in the Texas suit, Cornell seeks actual, consequential, special and punitive damages. Robert Schuwerk, a University of Houston Law Center professor and expert in the area of lawyer responsibility and malpractice, says Cornell must show that it was part of the defendants’ job as attorneys to establish the account in a way that would reasonably guard the client’s assets. Michael Shaunessy, an Austin, Texas, attorney who represents plaintiffs in legal malpractice cases but is not involved in Cornell’s suit against Locke Liddell, says the fact that a company hires lawyers to handle this type of transaction doesn’t eliminate the company’s responsibility to exercise due diligence in the matter. Shaunessy, a partner in Shaunessy & Burnett, says he expects Locke Liddell and Montgomery to raise a causation defense, arguing that those who took the money out of the account caused Cornell’s loss. Cornell can argue that, if the defendants had set up the account so that the money couldn’t be moved without the company’s authorization, Cornell would not have suffered the loss, he says. Schuwerk says Cornell has an advantage, particularly in a jury trial, because of the amount of money that’s involved in the suit. “If you’re entrusted with a whole lot of money, you have to be thinking that somebody will be trying to get hold of it,” he says.

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