Once a creditor obtains a judgment against a debtor, attempting to garnish the funds, accounts and assets of that debtor held by a third party is an extremely efficient and often successful means for collecting on that judgment. Chapter 77, Florida Statutes, governs garnishment actions within the State of Florida and provides for two main types of garnishment, which have been discussed in previous Blog posts. These include a Writ of Garnishment issued to a bank or financial institution and a Continuing Writ of Garnishment issued to a debtor’s employer. Although a judgment creditor can utilize both forms of garnishment in attempting to collect on the judgment, under Section 222.11, Florida Statutes, a debtor has the right to make claimed exemptions to garnishment actions when the debtor is head of household. However, such claimed exemptions may not preclude a creditor’s attempt at garnishment in certain situations. This Blog post discusses when claimed exemptions for head of household may not apply to garnishment actions when the debtor is an independent contractor, the sole owner of a corporation or an owner of a single member LLC.
In a mid-90s case from the U.S. Bankruptcy Court in the Southern District of Florida, the court held that an independent contractor’s earnings was not subject to a head of household claimed exemption. In re Manning, 163 B.R. 380 (Bankr. S.D. Fla. 1994). In that case, the debtor filed for bankruptcy and claimed $4,200 in a bank account as exempt. The bankruptcy trustee objected on the grounds that the funds were earned by the debtor as an independent contractor, not as an employee, and thus not exempt under Florida law. Id. at 381. The court agreed with the trustee. Id. at 382.
In coming to its decision, the court noted that the debtor earned his money from work performed on behalf of a company which was solely owned by the debtor’s wife. Id. at 381. While the company was owned entirely by the wife, the debtor was its only officer, solely responsible for the company’s day-to-day operations and received all of the income from the business. The court explained the debtor determined his own salary, commissions, bonuses, and employment status; he had no existing employment contract with the company; he used his own tools; and he paid his own expenses. Id. All parties involved in that lawsuit agreed the debtor was the head of a family as he was married with children; however, the issue concerning the claimed exemption was whether the $4,200 was for personal labor or services in an employer/employee context. Id.
The court relied on an 11th Circuit case which held that money due for personal labor or services must be money earned as an employee and not as money received as an independent contractor. In re Schlein, 8 F.3d 745 (11th Cir. 1993). The court then determined that the debtor was an independent contractor of the company, and not its employee, mainly due to the control the debtor exerted over the corporation. Manning, 163 B.R. 382. The court held that “a debtor that owns or controls a business cannot exempt the funds he distributes to himself from the business simply by calling the money ‘wages.’” Id. The court further clarified how a claimed exemption for head of household is to apply by stating that “for the exemption to apply, the debtor must not only perform personal services to the business, he must also receive regular compensation dictated by the terms of an arms-length employment agreement.” Id.
A year later, the same court had the opportunity to reconfirm its decision and reasoning on this specific issue. In re Zamora, 187 B.R. 783 (Bankr. S.D. Fla. 1995). In the Zamora case, the debtor earned money from two businesses where he was the sole owner of both. Id. at 783. The court, again, explained the income earned and receivables owed to the debtor’s businesses, in which he was the sole owner, “are not exempt earnings.” Id. The court expressly held that “earnings from a business controlled by a debtor are not exempt.” Id. at 785. In coming to its decision, the court said the determining factor here was not whether the debtor was an independent contractor or not, but rather, the determining factor was “whether the debtor’s activities were essentially a job or whether they were in the nature of running a business.” Id. Only if a debtor’s activities are functionally equivalent to that of an employee will a claim of exemption on earnings from a business be allowed. Id. The court’s reasoning is that “the legislature did not intend to exempt all funds a person chooses to draw from a business where the individual has full discretion over what expenses to pay or not pay in order to fund the draw.” Id.
While those two cases were from the Southern District of Florida, a more recent case, decided in 2010, confirmed these decisions and this line of reasoning within the Middle District of Florida. In re McDermott, 425 B.R. 848 (Bankr. M.D. Fla. 2010). In that case, the U.S. District Court for the Middle District of Florida also had to address whether compensation paid to a debtor from the debtor’s own business qualified as exempt earnings under Section 222.11, Florida Statutes. Id. The Middle District quoted directly from both the Manning and Zamora cases and said it found the reasoning behind both decisions persuasive. Id. Accordingly, the Middle District held that a “debtor who owns and runs his own business, without an arms-length employment agreement, and who has almost complete control and discretion over the timing and amount of his own compensation, cannot rely on Section 222.11 to exempt the funds.” Id.
These decisions should read as a loud warning to all sole owners of corporations and to all owners of single member LLCs in Florida. You cannot claim a head of household exemption on the earnings you receive from those entities to prevent a creditor from gaining access to those funds. Conversely, judgment creditors should find hope from these decisions. They provide judgment creditors with another avenue and effective tool for collecting against a debtor in these circumstances.