### I N THE UNI TED STATES COURT OF APPEALS FOR THE FI F TH CI RCUI T

No. 13-30073

In the Matter of: CHERYL ANN FLUGENCE,
Debtor. CHERYL ANN FLUGENCE; KEITH A. RODRIGUEZ, Appellees,

versus AXIS SURPLUS INSURANCE COMPANY; GREAT WEST CASUALTY COMPANY; A & R TRANSPORT, INCORPORATED; KENT SERRET, Appellants.
* * * * * * * * * * * * * * * In the Matter of: CHERYL ANN FLUGENCE,
Debtor. AXIS SURPLUS INSURANCE COMPANY; GREAT WEST CASUALTY COMPANY; A & R TRANSPORT, INCORPORATED; KENT SERRET, Appellants,

versus CHERYL ANN FLUGENCE; KEITH A. RODRIGUEZ, Appellees. U n i t e d S t a te s C o u r t o f A p p e al s F i f t h C i rc u i t 

### F I L E D October 4, 2013 Ly l e W . Cay ce Clerk Case: 13-30073 Document: 00512397750 Page: 1 Date Filed: 10/04/2013A ppeal from the United States District Court for the Western District of Louisiana

Before SMITH, DENNIS, and HIGGINSON, Circuit Judges. JERRY E. SMITH, Circuit Judge:

Cheryl Flugence filed for Chapter 13 bankruptcy protection in 2004, and

a plan w as confirmed. In March 2007, s he was injured in a car accident, and she hired an attorney a m o n th later. In July 2007, an amended Chapter 13 plan was confirmed. In March 2008 Flugence s ued the appellants for personal i n jury from the a ccident. In November 2 008, Flugence was discharged of all her remaining debts. She never disclosed to the ban k r u ptcy court, between March 2007 and July 2007 (when the amended plan w a s c onfirmed), or between July 2007 and November 2008 (when her debts were discharged), t hat s he had been in an accident and might prosecute a personal-injury claim. Once t he personal-injury defendants discovered this n on-disclosure, they had the bankruptcy case reopened and sought to have Fluge n c e j u d icially estopped from p ursuing the undisclosed claim. The bankruptcy court declared tha t a l t h o u gh Flugence was estopped from pursuing the claim on h er own behalf, her bankruptcy trustee was not similarly estopped and could pursue the claim for the benefit of F lugence’s c reditors in accordance with Reed v
. City of Arlington , 650 F.3d 571 (5th Cir. 2011) (en banc). On appeal, the district court reversed with respect to estopping Flugence and a ffirmed in all other respects. The district court held that the bankruptcy court had a bused i ts discretion by estopping Flugence because she “did not have

a potential cause of action prior to h er initial application for bankruptcy protection i n 2005,” and she relied on her attorney’s advice “as to whether she must

2 Case: 13-30073 Document: 00512397750 Page: 2 Date Filed: 10/04/2013No. 13-30073

disclose her potential cause of action to the bankruptcy court , ” a n d b e cause of the flux in the law at the time regar d i n g a debtor’s duty to disclose in postconfirmation, Chapter 13 proceedings. On appeal of the district court’s judgment, the personal-injury defendants contend that, with respect to Flugence, t he bankruptcy court d id not abu s e its discretion in declaring her estopped, so the bankruptcy c ourt’s judgment should be reinstated in that regard. With re s p e ct to t he t r ustee, the personal-injury defendants maintain that both the bankruptcy and district courts erred in holding that Reed allows a tr u s t e e to pursue an estopped debtor’s claim without limits o n the extent of possible recovery. Specifically, they argu e t h a t their
exposure to liability should be limited t o the a mount o f Flugence’s outstanding debt to creditors, about $44,000. We agree with t he personal-injury defendants that there is a continuing duty to disclose in a Chapter 13 proceeding and t hat Flugence h as met a l l the elements of judicial estoppel. Therefore, the bankruptcy court did not abuse its discretion by finding her estopped. We disagree with the personal-injury defendants’ reading o f Reed , however, be c a u s e n othing there requires that recovery be limited strict l y to the amount owed creditors. R eed sensibly requires only that, after a claim is prosecuted a nd the creditors and fees have b een paid, any remaining recovery must be returned to the person a l

- i njury defendants. We therefore reverse t he portion of the district court’s judgment that reversed the judgment of the bankruptcy court, and w e r ender judgment r einstating the bankruptcy court’s judgment in full.

I. “Although we are the second court to review the bankruptcy court’s judicial estoppel ruling, w e review it as if t h i s w e r e an appeal from a trial in the district court. B ecause judicial estoppel is an equitable doctrine, and the deci3 Case: 13-30073 Document: 00512397750 Page: 3 Date Filed: 10/04/2013No. 13-30073

sion whether to invoke it w ithin the court’s discretion, we re v i e w f o r abuse of discretion.” Browning Mfg. v. Mims (In r e C oastal Plains, I nc.) , 179 F.3d 197, 204–05 (5th Cir. 1999) (internal quotation marks and citations omitted). An abuse of discretion standard does not mean a mistake of law is beyond a ppellate correction, because a district court b y d e finition abuses its discretion wh e n it makes an error of l aw. Accordingly, the abuse of discretion standard includes r e view to d etermine that the discretion was not guided by erroneous legal conclusions.
Id. at 205 (internal quotation marks and citations omitted).

I I. Judicial e stoppe l h as three elements: ( 1) The p arty a gainst whom it is sought has asserted a legal position that is plainly inconsistent with a prior position; (2) a court accepted the prior position; and (3) the party did n ot act inadvertently. R eed , 650 F.3d at 574. The bankruptcy c ourt found all t hree elements here, and we cannot say it abused its discretion. Flugence’s main arg u ments to avoid estoppel are (1) that her cause of action a ccrued after t he initial confirmation; (2) that her non-disclosure was inadvertent because she did not k now she had to d isclose; and ( 3 ) t hat it was unclear w hether she had to disclose because of a conflict in t wo Bankruptcy Code provisions that h ave troubled the courts, i ncluding the Fifth Circuit. Each of these arguments attacks the third prong of the judicial estoppel test—whether Flugence acted inadvertently because she did not know she had a duty to disclose. E ach a lso challenges the f irst pro n g b y implication—if she did not have

a duty to disclose, then her failure to d isclose was not a representation that she had no claim, so she did not assert an inconsistent legal position. The bankruptcy court, however, rightly found the l a w on disclosure well settled: Chapter 13 debtors h ave a c o n t i n u ing obligation to disclose p o st-petition

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causes of action. 1 It may be uncertain whether a debtor must disclose assets post- c o nfirmation

. That uncertainty arises from two provisions in the Bankruptcy Code, one suggesting th a t post-confirmation causes of action are “property of the estate” and the other hinting that such property is “ vested” “in the d ebtor.” 2 That possible conflict, however, is irrelevant here. The latter provision vests property in the debtor unless otherwise specified by the confirmation p l a n

— a nd here, the plan explicitly stated t hat the estate’s assets would not revest i n the debtor until discharge. 3 At oral a rgument, Flugence’s attorney stated that there is still ambiguity, because the order s ays p roperty of the estate shall revest a fter discharge, but it

1 See, e. g. , Brow ni ng , 179 F. 3d at 207–08 ( “It goes w ithout saying that the Bank rup tcy Cod e and Rules im p os e up on bank rup tcy d ebtors an exp res s , af firm ative d uty to d is clos e all
as s ets , includ ing contingent and unliquid ated claim s . T he d uty of d is clos ure in a bank rup tcy p roceed ing is a continuing one, and a d ebtor is required to d is clos e all p otential caus es of action. ” ( internal quotation m ark s, em p has is , and citations om itted ) )

. The continuing d uty to d is clos e is a longs tand ing glos s required by our cas elaw

. See i d. ; Sup eri or Crew boa ts, Inc. v
. Pri m a ry P&I U

nderw ri ters (

In re Sup eri or Crew boa ts, I nc. ) , 374 F. 3d 330, 335 ( 5th Cir. 2004) ( “The d uty to d is clos e is continuous

. ”) ; Jethroe v
. O m nov a S ol uti ons, I nc. , 412 F. 3d 598, 600 ( 5th C ir. 2005) ( “The obligation to d is clos e p end ing and unliquid ated claim s in bank rup tcy p roceed ings is an ongoing one. ”) ; Ka ne v
. N a t’l U ni on Fi re Ins. Co. , 535 F. 3d 380, 384–85 ( 5th Cir. 2008) (“Purs uant to the Bank rup tcy Cod e, d ebtors are und er a continuing d uty to dis clos e all p end ing and p otential claim s. ”) ; Lov e v. Tyson Foods, Inc. , 677 F. 3d 258, 261 ( 5th Cir. 2012) ( “‘The obligation to d is clos e p end ing and unliquid ated claim s in bank rup tcy p roceed ings is an ongoing one. ’” ( quoting Jethroe , 412 F. 3d at 600) )

.

2 U nd er 11 U. S. C. § 1306( a) ( 1) , “Prop erty of the es tate includ es , in ad d ition to the p rop erty [ that typ ically becom es p r o p e r t y o f the es tate, ] all p rop erty of [ that] k ind

. . . that the d ebtor acquires af

ter the com m encem ent of the cas e but bef ore the cas e is clos ed , d is m is s ed , or converted to a cas e und er chap ter 7, 11, or 12 of this title, w hichever occurs firs t. ” Second , und er 11 U. S. C. § 1327( b) , “Excep t as otherw is e p rovid ed in the p lan or the ord er conf irm ing the p lan, the conf

irm ation of a plan ves ts all of the p rop erty of the es tate in the d ebtor. ” Theref ore, although a caus e of action acquired p o s t

- c o n f irm ation and p re- clos ure, - d is m is s al, or

- convers ion w ould s eem , on the one hand , to be “p rop erty of the es tate” und er § 1306( a) ( 1) , it
w ould als o ap p ear, on the other hand , to have “ves t[ ed ]

. . . in the d ebtor” und er § 1327( b)

.

3 The bank rup tcy court’s ord er conf irm ing Flugence’s p lan p rovid ed exp licitly that “[ n] o p rop erty of the e s t a t e w ill reves t in the d ebtor( s ) until s uch tim e as the d ebtor( s ) receive a d is charge or the cas e is d is m is s ed

. ” 5 Case: 13-30073 Document: 00512397750 Page: 5 Date Filed: 10/04/2013No. 13-30073

is unclear whether t he c ause of action ever was property of the estate. Even so,
our decisions h ave settled that debtors have a duty to disclose to t he bankruptcy court notwithstanding u ncertainty. The reason for the rule is o bvious: Whether

a particular asset should be available to satisfy creditors i s oft e n a c ontested issue, and the debtor’s duty to disclose assets

S S e ven w here he has a c ol o rable theory for why t hose assets should be shielded from creditors

SS a llows t h at issue to be decided as part of the orderly bankruptcy process. 4 Because F lugence had an affirmative duty to disclose her personal-injury claim t o t he b ankruptcy c ourt and did not d o so, she impliedly represented that she had n o such claim. 5 That is plainly inconsistent with her later assertion of the c laim in state court. Moreover, the bankruptcy court accepted the prior position by omitting any reference to the p ersonal-injury c l aim in the modified plan. Had the court been a ware of the claim, it may well have altered t h e plan. Therefore, the first two elements of judicial estoppel apply. The remaining question i s w h e t her F lugence acted inadvertently. Her representation that she did n ot know s h e had to disclose—and that she relied on t h e advice of her attorney—is unavailing on t his p rong of the test as well. T o establish inadvertence as that term is understood i n the judicial-estoppel jurisprudence, Flugence “may prove either that she did not know o f the inconsistent position or that she had n o m o t i v e t o conceal it from the court.” Jethroe , 412

4 See U ni ted Sta t es v
. Bea rd , 913 F. 2d 193, 197 (5th Cir. 1990) ( exp laining that d ebtors have a “d uty to d is clos e to the court the exis tence o f a s s e t s w hos e im m ed iate s tatus in the bank rup tcy is uncertain, even if that as s et is ultim ately d eterm ined to be outs id e of the bank

rup tcy es tate”) ; see a lso In re Robi nson , 292 B. R. 599, 607 ( Bank r. S. D

. O hio 2003) ( “[ D ] ebtors have the abs olute duty to rep ort w hatever interes ts they hold in p rop erty, even if they believe their as s ets are w orthles s or unavailable to the bank rup tcy es tate. This is becaus e the bank

rup tcy court, not the d ebtor, d ecid es w h a t prop erty is exem p t f rom the bank rup tcy es tate. ” ( internal quotation m ark s and citations om itted ) )

.

5 See Sup eri or Cr e w b o a t s , 374 F. 3d at 335 ( “[ T] he [ d ebtors ’] om is s ion of the p ers onal injury claim f

rom their m and atory bank rup tcy f ilings is tantam ount to a rep res entation that
no s uch claim exis ted

. ”)

. 6 Case: 13-30073 Document: 00512397750 Page: 6 Date Filed: 10/04/2013No. 13-30073

F.3d at 601. To prove t hat she “did not know of the inconsistent position,” she “must s how not that she was unaware that she had a duty to d isclose her claims but that

. . . she was unaware of t h e facts giving rise to them.” Id

. I n other words, “the controlling inquiry, with respect to inadvertence, is the knowing of facts g iving r ise to inconsistent positions

. . . . [A] lack of awareness of a statutory disclosure duty for [ ] legal claims is not relevant.” Id . at 601 n.4 (internal quotation marks and citation omitted). Flugence knew o f the facts underlying her personal-injury cla i m . The bankruptcy c ourt also found that she had motive to conceal, because her claim, if disclosed, would be avail a b le to the creditors. That she did not know that bankruptcy law r equired disclo s u re SS even if true

SS is, according to our precedents, irrelevant.

III. The personal-injury defendants contend t hat t he bankruptcy court erred in interpreting Reed t o a llow the trustee to pursue Flugence’s personal-injury claim without limitation. S p e c i f i c a l l y , t h e defendants contend that they are entit led to a declaration t hat, although the trustee may pursue the claim against them, their exposure is limited to the amount of Flugence’s debt to h er creditors. This is a legal issue this c ourt considers de novo
. Traina v. Whitney Nat’l Bank , 109 F.3d 244, 246 (5th Cir. 1997).

IV. Reed , 650 F.3d at 573, holds generally that, where a debtor is individually estopped from pursuing an undisclosed claim, “absent unusual circumstances,

an innocent t r u s tee can p ursue [the claim] for the b enefit of creditors.” The remedy affirmed in Reed provided t h at, though t h e d e b tor was p e rsonally estopped, the trustee “would b e free to [pursue the claim for recovery] for distri7 Case: 13-30073 Document: 00512397750 Page: 7 Date Filed: 10/04/2013No. 13-30073

bution t o [the debtor’s] creditors,” and “[a]ny remaining funds after distribution would b e refunded to the [defendants], and n ot to [the debtor].” Id

. That holding

w a s i n t e nded both to “deter dishonest debtors, w hose failure to fully a nd ho n estly disclo s e a l l t h eir assets undermines the integrity of the bankruptcy system,” a nd to “protect[] the rights o f creditors to a n equitable distribution of the assets of the debtor’s estate.” Id

. a t 574. N othing in Reed speaks to l iability limitations of the sort the personal-injury defendants seek, and for good reason. The basic thrust of the defendants’ argument is that it would be inconsistent with the goals o f bankruptcy to allow the trustee t o pursue a c laim where,

as here, it would disproport i o n a t ely b enefit the attorneys over t he creditors. Although the argument may be superficially appealing, if the personal-inj u ry defendants were entitled to the sort o f limitation they seek, then such declarations w ould tend to “ thwa r t one of the core goals o f the b ankruptcy system —obtaining a maximum and equitable d istributi o n f o r c r editors.” Id. at 577. Attorneys might n ot be willing to take on the case with a dim hope for recovery, so the creditors would collect nothing. The Bankruptcy Code adequately add r esses limitations on attorneys’ fees. Lawyers and other professionals may be employed “on any reasonable t erms and conditions of employment, including on a retainer, on an hourly basis, on a fixed

or percentage fee basis, or o n a contingent fee b asis,” and the court must approve such compensation a s r easonable. 11 U.S. C. §§ 328, 330. Because the trustee is a fiduciary of the estate, he has a duty t o ensure that the compen s a t i o n arrangements made with attorneys a nd o t h e r s are in the b est i nterests of the creditors. 6 In short, bankruptcy law already imposes limitations on professional compensation. In Reed , we rejected the notion that innocent creditors s hould b e punished

6 See genera l l

y U ni ted Pa c. Ins. Co. v
. McCl el l a nd ( In re Troy D odson Constr. Co. ) , 993 F. 2d 1211, 1216 ( 5th C ir. 1993) ( “The trus tee ow es a f id uciary duty to a l l the cred itors

. ”)

. 8 Case: 13-30073 Document: 00512397750 Page: 8 Date Filed: 10/04/2013No. 13-30073

for the debtor’s failure to comply with disclosure rules. “Judicial estoppel is an equitable d octrine, a nd using it to land another blow on t h e victims of bankruptcy fraud is not an equitable a pplication.” Reed , 6 30 F.3d at 576 (emphasis and citation omitted). T hat wrongful tortfeasors would be f avored over innocent creditors by the mere happenstance of t he debtor’s i ndependent non-disclosure turns equity on its head. Providing t he personal-injury d efendants t he windfall they seek is neither necessary nor desirable. 7 Accordingly, where a debtor is judicially estopped from pursuing a claim he failed to disclose to the bankruptcy court, the trustee, c onsistent with Reed , may pursue the claim without any limitation not otherwise imposed by law. The j u d g m ent of the district court is REVERSED, and judgment is RENDERED reinstating the judgment of the bankruptcy court.

7 The d ef

end ants ’ only other argum ent is that in R e e d w e p erm itted the attorney to recover cos ts becaus e he was a cred itor of the es tate. But the cited p as s age ref ers only to f

ees accrued bef

ore the conclus ion of the FM LA s uit in that cas e; the court als o p erm itted f ees f or w ork p erf

orm ed af

ter the FM LA jud gm ent. See Reed , 650 F. 3d at 576, 579. 9 Case: 13-30073 Document: 00512397750 Page: 9 Date Filed: 10/04/2013