I know that some large "Mart" type stores will prosecute/file charges for theft in criminal court and also file a civil action to pay for their costs in prosecuting the theft. I am guessing that is what this is. You could negotiate with them to reduce the $400 fee, I've been successful at doing that before. If you can pay them something, I would do it to avoid civil liability. When you say you "admitted to pay a $120 theft", do you mean you admitted it in criminal court?
All of this information does not mean that you should not verify that this is a legitimate demand. Call the company, ask questions like how did you get my name? and what is this in reference to? Make them tell you the facts of your case and the reasons behind the letter. Ask them who thier client is.
I'm not sure all of the facts of your case, and I'm not a Texas attorney, however, you should seek local counsel. This information is a good starting point for you. Depending on the answers to these questions, if you can just pay the money and you know it is legitimate, you may want to do that as an attorney will also cost you money, and you may end up paying the $400 anyway. This is not to say you do not need an attorney. Feel free to add additional information and re-ask your question here when you have asked questions of the Neal C. Tenen Law Corp.
That law firm is one of several that contract with retailers to do exactly what they're doing: send out intimidating letters to try to get you to pay money after an accusation of theft.
Their demand letter has nothing to do with criminal charges - not paying it does not mean that they criminal charges will be filed, nor does paying mean that no charges will be filed.
In reality, these firms rarely, if ever, file a civil suit. Why? Because the cost and hassle of doing so isn't worth it when the damages are so slight. Typically, the merchandise is recovered and put right back on the shelf, so they're not really out any money. The employees are already on the clock, so they didn't incur any expense for their salary.
If you choose to ignore that letter, they'll likely send a second. And a third. Finally, they have to make a choice - file a civil suit (most likely a small claims case) or let it go. The odds are overwhelmingly in your favor they let it go. If you are one of the extremely rare one that gets a suit filed against them, you can always choose to settle at that time... or fight and end up owing much less if they can't prove their damages.
You should probably consult with a local attorney about this to verify that there are no criminal charges pending and how to best proceed.
This does not constitute legal advice. Do your research and make your own decision after consulting with an attorney who can discuss the entire case and review the documents you have.