In re Pettit Case Analysis

In In re Pettit, 224 B.R. 834 (Bankr. M.D. Fla. 1998), a Florida bankruptcy court held that a 1099 medical-equipment salesman kept the head-of-family wage exemption for his commissions and bonuses. The court refused to decide the case by the employee-or-contractor label and asked instead whether his work was a job or a business he ran.

The decision sits against In re Schlein, 8 F.3d 745 (11th Cir. 1993), where the Eleventh Circuit read the statute’s pre-1993 text as excluding an independent contractor’s earnings. Five months later, In re Branscum, 229 B.R. 32 (Bankr. M.D. Fla. 1999), treated Schlein as the controlling law, so the answer can still depend on which court hears the claim.

The Commission Arrangement in In re Pettit

Algernon Pettit sold orthopedic implants and medical equipment for Mark DeBiase, Inc., a company doing business as Joint Venture, and was paid a $12,500 monthly commission plus a $10,000 quarterly bonus. There was no written agreement; a verbal one made him an independent contractor and barred him from competing with Joint Venture. Joint Venture issued him a 1099, withheld no taxes, provided no health insurance or retirement plan, and had no control over the hours he worked.

Jacksonville-area orders were credited to Pettit whether or not he made the sale, and a customer’s reorder earned him credit for the sale without a second presentation. He deposited his checks into an account he called his wage account, which in turn funded a joint checking account the court called the operating account.

Pettit and his wife filed a Chapter 7 petition on November 13, 1997. They claimed $23,392.43 in the wage account, $1,000 in the operating account, and $352,049.06 in a SEP/IRA as exempt. George Carter, a judgment creditor, objected to all three. Nobody disputed that Pettit was a head of family.

What the Court Held About an Independent Contractor’s Earnings

The bankruptcy court held that Pettit’s commissions and bonuses were exempt earnings under Florida’s head-of-family wage exemption even though he worked as an independent contractor. The court declared itself “unwilling to base its decision solely upon whether a debtor is labeled an employee or an independent contractor” and adopted a totality-of-the-circumstances approach. His activities, it found, were “a job and not in the nature of running a business.”

Pettit received regular compensation under an arm’s-length agreement, “albeit a verbal one.” His commission and bonus rose and fell with sales, but the company’s owner decided when and how much he was paid and could adjust both. He was no insider able to relabel a company’s receivables as wages. He could not take draws and owned no interest in the business.

The court built the test from In re Zamora, 187 B.R. 783 (Bankr. S.D. Fla. 1995), where a lawyer in solo practice who also owned a marina lost the exemption because he controlled his own pay and had no employment contract. Zamora had asked whether the debtor’s activities were a job or were in the nature of running a business, whatever the label, and Pettit agreed.

A Middle District decision, In re Lee, 190 B.R. 953 (Bankr. M.D. Fla. 1995), had read Zamora and Schlein together to keep a contractor’s earnings outside the exemption; the Pettit court declined to read Zamora that way. Lee‘s final ruling the next year, 204 B.R. 78 (Bankr. M.D. Fla. 1996), denied an insurance agent’s renewal commissions because he ran his agency as an independent businessman.

The Older Statute Behind In re Schlein

Before October 1993, Florida’s wage exemption protected money owed a head of family for “personal labor or services,” and a 1985 addition extended it to bank-deposited “wages”; the defined term “earnings” came later.

The Florida Supreme Court’s only decision on the question was Patten Package Co. v. Houser, 136 So. 353 (Fla. 1931). It denied the exemption to a man owed $703.19 for delivering petroleum products, because the money also covered his expenses and his adult son’s services, and it noted that he was an independent contractor.

Dr. Edward Schlein was an emergency room physician. A corporation in which he and his wife were officers, directors, and shareholders, Medical Emergency Department Services, held the hospital’s contract. After overhead, it distributed its profits to each shareholder physician by hours worked. Dr. Schlein was paid from those distributions. He received no wages, had no taxes withheld, did not consider himself an employee, and conceded on appeal that he was an independent contractor. The Schleins filed bankruptcy in 1988, and the trustee objected to their claim that a $54,253.55 checking account held exempt wages.

The Eleventh Circuit held that under Florida law an independent contractor’s earnings were not protected by the statute. It followed the bankruptcy courts that read Patten as an employee-only rule and relied on Refco, Inc. v. Sarmiento, 487 So. 2d 75 (Fla. 3d DCA 1986). Refco had framed the question as “whether appellee was an employee or an independent contractor,” though it found the debtor there was an employee.

Because the 1985 sentence protected only bank-deposited “wages” and Dr. Schlein was paid none, no wages had been deposited. The court also set aside the lower courts’ finding that he had failed to trace the funds, calling it clearly erroneous, so tracing formed no part of the ruling.

The amended statute took effect on October 1, 1993, two months before Schlein issued. It replaced “personal labor or services” with the defined term “earnings,” which names commission and bonus alongside wages and salary, and the word “employee” appears nowhere in the definition. It also replaced “wages” with “earnings” in the bank-deposit sentence and added a six-month window for traceable deposits that the older text never had.

The court in Zamora held that the amendment made exempt bank deposits coextensive with “earnings,” meaning “some of the reasoning in Schlein may no longer be applicable,” and Pettit followed that reading.

Do Florida Courts Still Bar an Independent Contractor’s Exemption?

Since the 1993 amendment, no Florida appellate court has squarely held that contractor status alone defeats the exemption, and Florida’s appellate courts decide these cases on the job-or-business question without asking which label applied. Some federal bankruptcy courts in Florida still apply Schlein‘s older rule, which has never been overruled, and a judge who treats it as binding can deny a contractor the exemption without reaching how the work was structured.

The Schlein line runs through decisions of the Middle District bankruptcy court, the court that decided Pettit, so the disagreement sits between judges of one court. Two years after Lee‘s final ruling, the same judge decided Branscum, a case about a private investigator who earned the money under Oracle International, P.A., a fictitious trade name. The court listed Pettit as contrary authority, held that Schlein “represents the controlling law on the issue,” and disallowed the exemption.

The Pettit line reaches Florida’s appellate courts. The Fourth District cited Pettit in Brock v. Westport Recovery Corp., 832 So. 2d 209 (Fla. 4th DCA 2002), and asked whether employment was a salaried job or was in the nature of running a business. It repeated that inquiry in Kane v. Stewart Tilghman Fox & Bianchi, P.A., 197 So. 3d 137 (Fla. 4th DCA 2016).

Neither was a contractor case, and neither cites Schlein. Both upheld the denial of the exemption to people paid by businesses they or their families controlled. As late as 2009, In re Holmes, 414 B.R. 868 (Bankr. S.D. Fla. 2009), still cited Schlein and Lee for the contractor rule while deciding a bartender’s gratuities claim on the arm’s-length test it traced to Pettit.

In 2015 the Eleventh Circuit, in a non-precedential decision called Tobkin, resolved a head-of-family dispute over business proceeds using Brock and Zamora; it cited Schlein only for the principle that federal courts follow the state courts on state statutes.

How In re Jans Applied the Test to a Real Estate Agent

In In re Jans, No. 9:15-bk-01763-FMD (Bankr. M.D. Fla. Feb. 24, 2016), the bankruptcy court’s Fort Myers division allowed the exemption to a real estate agent who had signed an independent contractor agreement, because her work was a job. Billie Jo Jans sold pre-construction condominium units at a Bonita Bay project under a 2014 letter agreement with The Ronto Group, which paid her, and a separate independent contractor agreement with a broker. She owned no interest in The Ronto Group or the project’s developer.

The letter agreement gave her a $4,000 monthly draw against future commissions, and she was paid a further $2,500 a month as team leader and office manager. She handled her own taxes and got no sick leave, vacation, or other benefits. The Ronto Group set daily coverage hours for the sales office, required weekly meetings, and required the agents to work there; its executive vice president and the project manager supervised her. She used her own insured car but paid no office rent or malpractice premiums and prepared no marketing materials.

When she and her husband filed Chapter 7 in February 2015, two creditors objected to her claim that $4,779.85 in two bank accounts was exempt earnings. The court rejected both of their arguments: that an independent contractor’s pay can never be earnings, and that commission-based pay is not “a sum certain.”

Commissions and bonuses are named in the statute, the court noted, and once pay has been received the only question is whether it was paid in a sum certain, which the letter agreement fixed. On the contractor argument, the court traced the employee-only reading to the pre-1993 statute’s word “wages” and found that courts after the amendment had “eschewed the bright-line distinction” between employees and contractors.

It cited Zamora, two 2013 bankruptcy decisions applying the same test, and the Eleventh Circuit’s Tobkin affirmance. The court overruled the objection: Jans did not control the amount or timing of her pay, the required office coverage bounded her scheduling, and her duties were “more akin to working at a job than running a business.”

What the Tracing Fight Cost the Pettits

Winning the earnings question saved Pettit $12,500 of the $23,392.43 he had claimed in his wage account, because Florida protects deposited earnings only when the debtor can trace and identify them as earnings. The objecting creditor must first show that a claimed exemption is improper; the burden then shifts to the debtor to prove it. The statute adds that commingling earnings with other funds does not by itself defeat tracing; Pettit lost on unexplained cash and an untraced reimbursement rather than on commingling.

Of the $23,042.43 Pettit deposited into the wage account on the petition date, the $12,500 October commission was traced directly from Joint Venture and allowed; the rest failed. A $1,542.43 expense reimbursement was not shown to have come from commissions he had already earned, and the court would not assume he had paid the underlying expenses with exempt money.

At his deposition Pettit could not recall the source of $11,000 deposited that day; the next day at trial he said it was cash kept at home, and the court disallowed the $9,000 he claimed. The account’s $306.74 opening balance fell too, since the court would not assume it was commission rather than reimbursement.

The $1,000 claimed in the operating account also failed. The Pettits proposed a first-in, first-out accounting for the transfers from the wage account; the court declined to presume those transfers were only exempt funds when only part of that account was exempt. The $352,049.06 SEP/IRA was allowed in full because the creditor never put the account’s governing document in evidence and could not prove it failed the tax code.

What In re Pettit Means for Independent Contractors Today

An independent contractor who is a Florida head of family can claim the wage exemption when the arrangement works like a job. That means pay set by the other side under an arm’s-length agreement, no ownership interest in the payor, and no power to take draws or decide when and how much the contractor is paid. The head of household exemption then shields the earnings from garnishment, and deposited earnings stay protected for six months if they can be traced.

Pettit won on a verbal agreement, and the statute requires no writing, but a written agreement that fixes the commission terms and the payor’s control over payment is easier evidence than testimony about an oral deal. Depositing commission checks into an account that receives nothing else, as Pettit did, still left him with a tracing dispute over the other deposits; a wage account protects only what the debtor can show came from earnings.

A business owner who pays himself lands on the business side of the job-or-business question. The lawyer in Zamora and the two law-firm shareholders in Kane lost because they controlled their own pay, and self-employment income drawn from a business the debtor controls does not become exempt by being called salary.

An independent contractor claiming the head of household exemption in a Florida state-court garnishment faces the Fourth District’s job-or-business inquiry; in bankruptcy the same person may draw a judge who follows Schlein and Branscum and denies the exemption on the label.

The head-of-family cases sit with Florida’s other garnishment decisions on writ procedure, deadlines, and written waivers. Florida’s entireties, homestead, and fraudulent transfer decisions, which govern what a creditor can reach beyond wages, are in the same Florida case law collection.