In re: NELL CARTER

• Citation: 182 F.3d 1027
• Decision Date: 15 April 1999
• Docket Number: No. 97-55117,97-55117
• Parties: (9th Cir. 1999) In re: NELL CARTER, Debtor. NELL CARTER, Appellant, v. PETER C. ANDERSON, Chapter 7Trustee,Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1027

182 F.3d 1027 (9th Cir. 1999)

In re: NELL CARTER, Debtor.

NELL CARTER, Appellant, v. PETER C. ANDERSON, Chapter 7Trustee,Appellee.

No. 97-55117

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted April 15, 1999--Pasadena, California

Filed August 11, 1999

COUNSEL: Steven E. Smith, Danning, Gill, Diamond & Kollitz, Los Angeles, California, for the appellant.

Julie A. Page and John P. Pringle, Roquemore, Pringle & Moore, Los Angeles, California, for the appellee.

Appeal from the Bankruptcy Appellate Panel Lawrence Ollason and Alfred C. Hagan, Bankruptcy Judges, Presiding

Before: Dorothy W. Nelson, Ferdinand F. Fernandez, and William A. Fletcher, Circuit Judges.

OPINION

W. Fletcher, Circuit Judge:

Appellant-debtor Nell Carter filed for personal bankruptcy under Chapter 7. In her bankruptcy schedules she claimed that a check for $43,260.58 received from her sub-chapter S corporation constituted employee earnings under California Civil Procedure Code ("C.C.P.") S 706.011 and was therefore exempt from inclusion in the bankruptcy estate under C.C.P. S 704.070(b). The bankruptcy court sustained the trustee's objection to Carter's claimed exemption, and a divided panel of the Ninth Circuit Bankruptcy Appellate Panel affirmed. We reverse and remand for further proceedings.

Background and Prior Proceedings

Carter, a professional entertainer, is the sole shareholder, director, and officer of a sub-chapter S corporation named Krynicki, Inc. ("Krynicki").¹ Krynicki enters into agreements with nightclubs, casinos, and other establishments at which Carter entertains, and Carter is then paid by Krynicki for her services.

On April 3, 1995, Krynicki issued to Carter a check for $43,260.58. The "pay stub" attached to the check indicated "earnings" of $78,714.00, "YTD [year-to-date] earnings" of $78,714.00, a pay period from 4-03-95 to 4-03-95, and deductions of $35,453.42 for income and other taxes. On April 11, 1995, Carter filed a petition for Chapter 7 bankruptcy. On April 25, 1995, Carter filed Schedule C claiming $39,000 as an exemption from the estate, corresponding to the estimated amount of money from the check remaining in her bank account at the time of the filing.²

The trustee does not dispute that $39,000 was the amount remaining.

The trustee objected to the claimed exemption. Because California has opted out of the federal scheme of exemptions under 11 U.S.C. S 522(d), see C.C.P.S 703.130, Carter's right to the exemption is determined under California law. The exemption was claimed pursuant to C.C.P. S 704.070(b), which allows a debtor to exempt 75 percent of "paid earnings," as "earnings" are defined inS 706.011. In relevant part, S 706.011 provides:

(a) "Earnings" means compensation payable by an employer to an employee for personal services per formed by such employee, whether denominated as wages, salary, commission, bonus, or otherwise.

. . .

(c) "Employee" means a public officer and any individual who performs services subject to the right of the employer to control both what shall be done and how it shall be done.

(d) "Employer" means a person for whom an indi vidual performs services as an employee.

. . .

(g) "Person" includes an individual, a corporation, a partnership or other unincorporated association, a limited liability company, and a public entity.

Whether Carter properly claimed the exemption under California law depends on whether Carter was an "employee" of Krynicki and received the $43,260.58 check as "earnings."

The trustee contends that Carter drained Krynicki's corporate account on the eve of bankruptcy and mis-characterized the April 3 payment as employee earnings under S 706.011 in order to exempt it from the bankruptcy estate. At a hearing before the bankruptcy court on October 3, 1995, Carter argued that she was an employee of Krynicki, whereas the trustee argued that she was an independent contractor. (Payments to an independent contractor are not treated as employee earnings under S 706.011 and are thus not exempted from the estate.) During that hearing, the bankruptcy court focused exclusively on the question of Carter's employee or independent contractor status. The hearing was continued until November 14, 1995, at which point Carter again argued that she was an employee. With no further discussion and without findings of fact, the bankruptcy court at that hearing sustained the trustee's objection to the claimed $39,000 exemption.

A divided panel of the Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed. The majority concluded, "The trustee's evidence rebutted Carter's prima facie exemption claim. Carter was unsuccessful in producing sufficient evidence to show that she was an employee. The bankruptcy court's implicit finding that Carter was not compensated as an employee was not clearly erroneous[.]" The dissent argued for a remand on the ground that the bankruptcy court may have misunderstood the relationship between a subchapter S corporation and its shareholder/employee.

Discussion

For Carter to be entitled to an exemption underS 706.011, she must show both that she was an "employee" of Krynicki and that the check for $43,260.58 was payment of "earnings" within the meaning of that provision.³ We discuss "employee" status and "earnings" in turn.

1. Was Carter an "employee" under S 706.011?

The distinction between an employee or an independent contractor is made in many areas of the law, including income taxation (see Spicer Accounting, Inc. v. United States, 918 F.2d 90 (9th Cir. 1990)), Employment Retirement Income Security Act of 1974 (ERISA) (see Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992)), workers' compensation (see S.G. Borello & Sons, Inc. v. Dep't. of Indus., 48 Cal. 3d 341 (1989)), and employment discrimination (see Adcock v. Chrysler Corp., 166 F.3d 1290 (9th Cir. 1990), petition for cert. filed, 67 U.S.L.W. 3749 (U.S. May 10, 1999) (No. 981902)), among many others. Indeed, whenever a federal statute uses the term "employee" and "contains no other provision that either gives specific guidance to the meaning of the term `employee' or suggests that the common law definition is inappropriate, we must presume that Congress intended to incorporate traditional principles of agency law. " Loomis Cabinet Co. v. OSHRC, 20 F.3d 938, 941 (9th Cir. 1994) (citing Nationwide Mut., 503 U.S. 318 (1992)). California has also recognized that "[m]uch 20th-century legislation for the protection of `employees' has adopted the `independent contractor' distinction as an express or implied limitation on coverage." S.G. Borello & Sons, 48 Cal. 3d at 350. When a distinction between "employees" and "independent contractors" becomes relevant, both federal and state law provide multiple-factor tests that distinguish one from the other.

California follows the traditional common law distinction between "employees" and "independent contractors," generally referring to the factors set forth in the Restatement (Second) of Agency S 220. See id. at 350-351 (1989). The "principal test" is "whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired." Id. at 350 (quoting Tieberg v. Unemployment Ins. Appeals Bd., 2 Cal. 3d 943, 946 (1970)). California courts have developed multiple factors indicative of "control," including: (1) whether the person performing services is engaged in a distinct occupation or business; (2) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (3) the skill required in the particular occupation; (4) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (5) the length of time for which the services are to be performed; (6) the method of payment, whether by the time or by the job, (7) whether or not the work is a part of the regular business of the principal; and (8) whether or not the parties believe they are creating the relationship of employer-employee. See S.G. Borello & Sons, 48 Cal. 3d at 351; see also Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751-52 (1989) (listing similar factors). Reflecting on a trend in applying these factors, the California Supreme Court has noted that "[t]he modern tendency is to find employment when the work being done is an integral part of the regular business of the employer, and when the worker, relative to the employer, does not furnish an independent business or professional service." S.G. Borello & Sons, 48 Cal. 3d at 357 (quoting 1C Larson, The Law of Workmen's CompensationS 45.00, p. 8174 (1986)).

Using a short-hand version of the standard test, C.C.P. S 706.011 defines an "employee" as "any individual who performs services subject to the right of the employer to control both what shall be done and how it shall be done."⁴ We believe that under this definition it is enough that Carter was subject to the "right" of the corporation to control her performance. A test requiring actual control would not be welldesigned for a person, like Carter, who claims to be an employee but who is also the sole shareholder of a subchapter S corporation. Because the would-be employee is also the sole shareholder, she is not controlled by the corporation in the same way as a person who is an employee (but not the sole shareholder) of a subchapter S corporation, or who is an employee of a non-subchapter S corporation. But even outside the context of subchapter S corporations and bankruptcy exclusion statutes, California law does not insist on actual control. Under California law, "it is the right to control, not the exercise of the right, which bears on the status of the work arrangement." S.G. Borello & Sons, 48 Cal. 3d at 357 n.9.⁵

On the record before us, it is clear that Carter is an employee of Krynicki...