It did happen. The flashback was back to when Lana first met Jude (just as they were walking down to see Bloodyface enter the building). Jude was basically foreshadowing the whole events of Asylum.
Sister Jude: "I do hope you know what you are in for. The loneliness, the heartbreak, the sacrifice you will face as a woman with a dream on her own."
Lana: "You don't have any idea of what I'm capable of."
Sister Jude: "Well, then, look at you, Ms. Lana Banana. Just remember if you look in the face of evil, evil's gonna look right back at you."
Judge was basically warning her, if you poke your nose into this evil place (the Asylum), you will become evil yourself and face loneliness, heartbreak and sacrifices.
Jude was right too, that's what Lana faced because she poked her nose in. She became rich out of it. But she had to murder her own son. She sacrificed her career for a dream of 'exposing' Briarcliff and she became very lonely. Jude pretty much foreshadowed everything before Lana experienced it.
