On November 22, 2013, the US Court of Appeals for the Fifth Circuit held that a bankruptcy trustee may prosecute claims on behalf of a personal injury plaintiff who is found to be judicially estopped from asserting those claims herself (In re Flugence, No. 13-30073, (5th Cir. Nov. 22, 2013)). The court also held that the trustee may seek damages greater than the amount the debtor owes her creditors.

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. In July 2007, an amended Chapter 13 plan was confirmed. In March 2008, Flugence filed a personal injury action based on the March 2007 car accident. In November 2008, Flugence was discharged of all her remaining debts. Prior to November 2008, Flugence did not tell the bankruptcy court that she had been in an accident 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 could pursue the claim for the benefit of Flugence’s creditors.

On appeal, the district court reversed. The district court reasoned that Flugence should not be estopped because (among other things) she did not have a potential cause of action prior to her initial application for bankruptcy protection.

The personal-injury defendants appealed to the Fifth Circuit.

The Fifth Circuit reversed the district court's judgment and held that Flugence should be judicially estopped from prosecuting her personal injury claim. Although Flugence's personal injury claim did not arise until after she initially sought bankruptcy protection, the court concluded that there is a continuing duty to disclose post-petition causes of action. Flugence did not comply with this duty. According to the Fifth Circuit, had the bankruptcy court been aware of the personal injury claim, "it may well have altered the plan."

The Fifth Circuit went on to hold, however, that Flugence's estoppel did not extend to the Chapter 13 bankruptcy trustee. In addition, the Fifth Circuit rejected the personal-injury defendants' contention that the trustee should be limited to seeking only $44,000 in damages – the amount of Flugence's outstanding debt to creditors. The Fifth Circuit reasoned that placing limits on the amount of damages recoverable could ultimately harm creditors because attorneys might not be willing to take a case "with a dim hope for recovery" that could otherwise be used to satisfy the creditors' claims. The Fifth Circuit's decision did suggest, however, that the personal-injury defendants would receive any remaining funds that might be awarded to the trustee in the personal injury suit after Flugence's creditors and plaintiff's counsel are paid.

Flugence serves as a reminder that debtors have a duty to disclose all assets, including potential lawsuits, before a bankruptcy plan is confirmed. Failure to do so may jeopardize the debtor's right to recovery. Further, under Flugence, defendants sued by a debtor in an undisclosed and unrelated action have an incentive to raise the debtor's non-disclosure with the bankruptcy court. This is true even if the bankruptcy trustee is ultimately allowed to "step into the shoes" of the debtor. As Flugence suggests, the defendant's exposure in the unrelated suit may effectively be capped at the amount the debtor owes her creditors and the plaintiff's attorneys' fees. Depending on the circumstances, this could be far less than what the defendant might otherwise be liable for.