   Case: 13-30073    Document: 00512397750     Page: 1   Date Filed: 10/04/2013




         IN THE UNITED STATES COURT OF APPEALS
                  FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                  Fifth Circuit

                                                                FILED
                                                              October 4, 2013
                              No. 13-30073
                                                               Lyle W. Cayce
                                                                    Clerk
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.
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                 Appeal 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 was confirmed. In March 2007, she was injured in a car accident, and she
hired an attorney a month later. In July 2007, an amended Chapter 13 plan was
confirmed. In March 2008 Flugence sued the appellants for personal injury from
the accident. In November 2008, Flugence was discharged of all her remaining
debts. She never disclosed to the bankruptcy court, between March 2007 and
July 2007 (when the amended plan was confirmed), or between July 2007 and
November 2008 (when her debts were discharged), that she had been in an acci-
dent and might prosecute a personal-injury claim.
      Once the personal-injury defendants discovered this non-disclosure, they
had the bankruptcy case reopened and sought to have Flugence judicially
estopped from pursuing the undisclosed claim. The bankruptcy court declared
that although Flugence was estopped from pursuing the claim on her own behalf,
her bankruptcy trustee was not similarly estopped and could pursue the claim
for the benefit of Flugence’s creditors in accordance with Reed v. City of Arling-
ton, 650 F.3d 571 (5th Cir. 2011) (en banc).
      On appeal, the district court reversed with respect to estopping Flugence
and affirmed in all other respects. The district court held that the bankruptcy
court had abused its discretion by estopping Flugence because she “did not have
a potential cause of action prior to her initial application for bankruptcy protec-
tion in 2005,” and she relied on her attorney’s advice “as to whether she must


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                                    No. 13-30073

disclose her potential cause of action to the bankruptcy court,” and because of
the flux in the law at the time regarding a debtor’s duty to disclose in post-
confirmation, Chapter 13 proceedings.
      On appeal of the district court’s judgment, the personal-injury defendants
contend that, with respect to Flugence, the bankruptcy court did not abuse its
discretion in declaring her estopped, so the bankruptcy court’s judgment should
be reinstated in that regard. With respect to the trustee, the personal-injury
defendants maintain that both the bankruptcy and district courts erred in hold-
ing that Reed allows a trustee to pursue an estopped debtor’s claim without
limits on the extent of possible recovery. Specifically, they argue that their
exposure to liability should be limited to the amount of Flugence’s outstanding
debt to creditors, about $44,000.
      We agree with the personal-injury defendants that there is a continuing
duty to disclose in a Chapter 13 proceeding and that Flugence has met all the
elements of judicial estoppel. Therefore, the bankruptcy court did not abuse its
discretion by finding her estopped. We disagree with the personal-injury defen-
dants’ reading of Reed, however, because nothing there requires that recovery
be limited strictly to the amount owed creditors. Reed sensibly requires only
that, after a claim is prosecuted and the creditors and fees have been paid, any
remaining recovery must be returned to the personal-injury defendants. We
therefore reverse the portion of the district court’s judgment that reversed the
judgment of the bankruptcy court, and we render judgment reinstating the
bankruptcy court’s judgment in full.


                                         I.
      “Although we are the second court to review the bankruptcy court’s judi-
cial estoppel ruling, we review it as if this were an appeal from a trial in the
district court. Because judicial estoppel is an equitable doctrine, and the deci-

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                                   No. 13-30073

sion whether to invoke it within the court’s discretion, we review for abuse of
discretion.” Browning Mfg. v. Mims (In re Coastal Plains, Inc.), 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 appellate correction, because a district court by definition
      abuses its discretion when it makes an error of law. Accordingly,
      the abuse of discretion standard includes review to determine that
      the discretion was not guided by erroneous legal conclusions.

Id. at 205 (internal quotation marks and citations omitted).



                                         II.
      Judicial estoppel has three elements: (1) The party against whom it is
sought has asserted a legal position that is plainly inconsistent with a prior posi-
tion; (2) a court accepted the prior position; and (3) the party did not act inadver-
tently. Reed, 650 F.3d at 574. The bankruptcy court found all three elements
here, and we cannot say it abused its discretion.
      Flugence’s main arguments to avoid estoppel are (1) that her cause of
action accrued after the initial confirmation; (2) that her non-disclosure was
inadvertent because she did not know she had to disclose; and (3) that it was
unclear whether she had to disclose because of a conflict in two Bankruptcy Code
provisions that have troubled the courts, including 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 dis-
close. Each also challenges the first prong by implication—if she did not have
a duty to disclose, then her failure to disclose 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 law on disclosure well
settled: Chapter 13 debtors have a continuing obligation to disclose post-petition


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                                         No. 13-30073

causes of action.1
       It may be uncertain whether a debtor must disclose assets post-confirma-
tion. That uncertainty arises from two provisions in the Bankruptcy Code, one
suggesting that post-confirmation causes of action are “property of the estate”
and the other hinting that such property is “vested” “in the debtor.”2 That possi-
ble conflict, however, is irrelevant here. The latter provision vests property in
the debtor unless otherwise specified by the confirmation plan—and here, the
plan explicitly stated that the estate’s assets would not revest in the debtor until
discharge.3
       At oral argument, Flugence’s attorney stated that there is still ambiguity,
because the order says property of the estate shall revest after discharge, but it


       1
         See, e.g., Browning, 179 F.3d at 207–08 (“It goes without saying that the Bankruptcy
Code and Rules impose upon bankruptcy debtors an express, affirmative duty to disclose all
assets, including contingent and unliquidated claims. The duty of disclosure in a bankruptcy
proceeding is a continuing one, and a debtor is required to disclose all potential causes of
action.” (internal quotation marks, emphasis, and citations omitted)). The continuing duty to
disclose is a longstanding gloss required by our caselaw. See id.; Superior Crewboats, Inc. v.
Primary P&I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330, 335 (5th Cir. 2004)
(“The duty to disclose is continuous.”); Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600
(5th Cir. 2005) (“The obligation to disclose pending and unliquidated claims in bankruptcy pro-
ceedings is an ongoing one.”); Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 384–85 (5th Cir.
2008) (“Pursuant to the Bankruptcy Code, debtors are under a continuing duty to disclose all
pending and potential claims.”); Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012)
(“‘The obligation to disclose pending and unliquidated claims in bankruptcy proceedings is an
ongoing one.’” (quoting Jethroe, 412 F.3d at 600)).
       2
         Under 11 U.S.C. § 1306(a)(1), “Property of the estate includes, in addition to the prop-
erty [that typically becomes property of the estate,] all property of [that] kind . . . that the
debtor acquires after the commencement of the case but before the case is closed, dismissed,
or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.” Second,
under 11 U.S.C. § 1327(b), “Except as otherwise provided in the plan or the order confirming
the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” There-
fore, although a cause of action acquired post-confirmation and pre-closure, -dismissal, or
-conversion would seem, on the one hand, to be “property of the estate” under § 1306(a)(1), it
would also appear, on the other hand, to have “vest[ed] . . . in the debtor” under § 1327(b).
       3
        The bankruptcy court’s order confirming Flugence’s plan provided explicitly that “[n]o
property of the estate will revest in the debtor(s) until such time as the debtor(s) receive a
discharge or the case is dismissed.”

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is unclear whether the cause of action ever was property of the estate. Even so,
our decisions have settled that debtors have a duty to disclose to the bankruptcy
court notwithstanding uncertainty. The reason for the rule is obvious: Whether
a particular asset should be available to satisfy creditors is often a contested
issue, and the debtor’s duty to disclose assetsSSeven where he has a colorable
theory for why those assets should be shielded from creditorsSSallows that issue
to be decided as part of the orderly bankruptcy process.4
       Because Flugence had an affirmative duty to disclose her personal-injury
claim to the bankruptcy court and did not do so, she impliedly represented that
she had no such claim.5 That is plainly inconsistent with her later assertion of
the claim in state court. Moreover, the bankruptcy court accepted the prior posi-
tion by omitting any reference to the personal-injury claim in the modified plan.
Had the court been aware of the claim, it may well have altered the plan.
Therefore, the first two elements of judicial estoppel apply.
       The remaining question is whether Flugence acted inadvertently. Her
representation that she did not know she had to disclose—and that she relied on
the advice of her attorney—is unavailing on this prong of the test as well. To
establish inadvertence as that term is understood in the judicial-estoppel juris-
prudence, Flugence “may prove either that she did not know of the inconsistent
position or that she had no motive to conceal it from the court.” Jethroe, 412


       4
         See United States v. Beard, 913 F.2d 193, 197 (5th Cir. 1990) (explaining that debtors
have a “duty to disclose to the court the existence of assets whose immediate status in the
bankruptcy is uncertain, even if that asset is ultimately determined to be outside of the bank-
ruptcy estate”); see also In re Robinson, 292 B.R. 599, 607 (Bankr. S.D. Ohio 2003) (“[D]ebtors
have the absolute duty to report whatever interests they hold in property, even if they believe
their assets are worthless or unavailable to the bankruptcy estate. This is because the bank-
ruptcy court, not the debtor, decides what property is exempt from the bankruptcy estate.”
(internal quotation marks and citations omitted)).
       5
         See Superior Crewboats, 374 F.3d at 335 (“[T]he [debtors’] omission of the personal
injury claim from their mandatory bankruptcy filings is tantamount to a representation that
no such claim existed.”).

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                                   No. 13-30073

F.3d at 601. To prove that she “did not know of the inconsistent position,” she
“must show not that she was unaware that she had a duty to disclose her claims
but that . . . she was unaware of the facts giving rise to them.” Id. In other
words, “the controlling inquiry, with respect to inadvertence, is the knowing of
facts giving rise to inconsistent positions . . . . [A] lack of awareness of a statu-
tory disclosure duty for [] legal claims is not relevant.” Id. at 601 n.4 (internal
quotation marks and citation omitted).
      Flugence knew of the facts underlying her personal-injury claim. The
bankruptcy court also found that she had motive to conceal, because her claim,
if disclosed, would be available to the creditors. That she did not know that
bankruptcy law required disclosureSSeven if trueSSis, according to our prece-
dents, irrelevant.


                                        III.
      The personal-injury defendants contend that the bankruptcy court erred
in interpreting Reed to allow the trustee to pursue Flugence’s personal-injury
claim without limitation. Specifically, the defendants contend that they are enti-
tled to a declaration that, although the trustee may pursue the claim against
them, their exposure is limited to the amount of Flugence’s debt to her creditors.
This is a legal issue this court 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 trustee can pursue [the claim] for the benefit of creditors.” The
remedy affirmed in Reed provided that, though the debtor was personally
estopped, the trustee “would be free to [pursue the claim for recovery] for distri-

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                                      No. 13-30073

bution to [the debtor’s] creditors,” and “[a]ny remaining funds after distribution
would be refunded to the [defendants], and not to [the debtor].” Id. That holding
was intended both to “deter dishonest debtors, whose failure to fully and hon-
estly disclose all their assets undermines the integrity of the bankruptcy sys-
tem,” and to “protect[] the rights of creditors to an equitable distribution of the
assets of the debtor’s estate.” Id. at 574. Nothing in Reed speaks to liability lim-
itations of the sort the personal-injury defendants seek, and for good reason.
       The basic thrust of the defendants’ argument is that it would be inconsis-
tent with the goals of bankruptcy to allow the trustee to pursue a claim where,
as here, it would disproportionately benefit the attorneys over the creditors.
Although the argument may be superficially appealing, if the personal-injury
defendants were entitled to the sort of limitation they seek, then such declara-
tions would tend to “thwart one of the core goals of the bankruptcy system
—obtaining a maximum and equitable distribution for creditors.” Id. at 577.
Attorneys might not be willing to take on the case with a dim hope for recovery,
so the creditors would collect nothing.
       The Bankruptcy Code adequately addresses limitations on attorneys’ fees.
Lawyers and other professionals may be employed “on any reasonable terms and
conditions of employment, including on a retainer, on an hourly basis, on a fixed
or percentage fee basis, or on a contingent fee basis,” and the court must approve
such compensation as reasonable. 11 U.S.C. §§ 328, 330. Because the trustee
is a fiduciary of the estate, he has a duty to ensure that the compensation
arrangements made with attorneys and others are in the best interests of the
creditors.6 In short, bankruptcy law already imposes limitations on professional
compensation.
       In Reed, we rejected the notion that innocent creditors should be punished

       6
        See generally United Pac. Ins. Co. v. McClelland (In re Troy Dodson Constr. Co.), 993
F.2d 1211, 1216 (5th Cir. 1993) (“The trustee owes a fiduciary duty to all the creditors.”).

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                                       No. 13-30073

for the debtor’s failure to comply with disclosure rules. “Judicial estoppel is an
equitable doctrine, and using it to land another blow on the victims of bank-
ruptcy fraud is not an equitable application.” Reed, 630 F.3d at 576 (emphasis
and citation omitted). That wrongful tortfeasors would be favored over innocent
creditors by the mere happenstance of the debtor’s independent non-disclosure
turns equity on its head. Providing the personal-injury defendants the 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, consistent with Reed,
may pursue the claim without any limitation not otherwise imposed by law. The
judgment of the district court is REVERSED, and judgment is RENDERED
reinstating the judgment of the bankruptcy court.




       7
         The defendants’ only other argument is that in Reed we permitted the attorney to
recover costs because he was a creditor of the estate. But the cited passage refers only to fees
accrued before the conclusion of the FMLA suit in that case; the court also permitted fees for
work performed after the FMLA judgment. See Reed, 650 F.3d at 576, 579.

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