Texas Lawyers Con Existing Client to Loan One of Law Firms Clients Money, Which Went Right Back to Law Firm in Attorney Fees

Ex-Client Lodges $1.3M Fraud Suit Against Foley & Lardner, 2 Houston Lawyers

A former client of Foley & Lardner claims the firm and two of its lawyers fraudulently induced him to invest in another firm client that was having cash-flow problems.

June 16, 2020

A Houston company is seeking $1.3 million from Foley & Lardner and two of its lawyers, alleging they “perpetrated an outright fraud” to induce it to invest and loan money to another firm client.

The plaintiff, Schumann/Steier Holdings, accuses Foley and the attorneys of ”numerous misrepresentations and omissions as well as breaches of fiduciary duty.”

In addition to the law firm, the suit names special counsel Anacarolina Estaba, partner Peter McLauchlan and McLauchlan Family Properties. Bedfeld and McLauchlan split their practices between Houston and New York.

A spokeswoman for Foley wrote in an email that the firm declines comment on the allegations in Schumann/Steier Holdings v. Foley & Lardner. Neither McLauchlan nor Estaba immediately responded to emails seeking comment.

As alleged in the petition filed June 12 in state district court in Harris County, Schumann/Steier president Arthur Steier, at the request of his longtime counsel, Foley partner John Melko of Houston, met in December 2018 with McLauchlan, Estaba and JP Garza, the founder of Straight Line Construction.

At that meeting, Steier learned that Straight Line needed funding to resolve a “short-term cash crisis.”

Steier agreed to make an equity investment in Straight Line, which he agreed to only if Foley was prepared to invest along with him, the petition asserts.

Schumann/Steier Holdings ultimately invested $430,000, with McLauchlan investing $50,000 through his family limited partnership, and Estaba contributing $20,000 of her own money, the petition alleges.

“Within a few months, Straight Line needed more money,” the petition says, with Steier agreeing to a loan only if the defendants would also provide loan money.

The new loans totaled $860,000 from the plaintiff, $100,000 from McLauchlan and his family partnership, and $40,000 from Estaba.

However, according to the petition, McLauchlan, his family partnership and Estaba conspired to avoid contributing any additional capital as Garza provided them with $140,000 of Straight Line money for their share of the loan.

“These defendants were not providing Straight Line with additional working capital, as they claimed, but simply giving the company its own money back … with the express intent to defraud and entice plaintiff to make its proportional contribution,” the petition alleges.

Ultimately, a few months later, the plaintiff alleges, the loans defaulted and the collateral provided to secure the loans “turned out to be worthless, or at least close to worthless.”

Schumann/Steier also alleges that adding “insult to injury,” it discovered that much of the money it had invested in Straight Line was actually used to pay legal fees to Foley.

“The obvious conflict of interest created where plaintiff’s investment was ultimately going directly to his own law firm to pay for another client’s legal bills was a clear breach of fiduciary duty and not appropriately disclosed,” the petition alleges.

Schumann/Steier alleges the defendants violated the Texas Securities Act and the Texas Business and Commerce Code, and it brings breach of fiduciary duty, fraud, fraudulent inducement, negligent misrepresentation and civil conspiracy causes of action against all defendants.

The plaintiff also brings a breach of contract cause of action against McLauchlan and his family company and Estaba.