June 19, 2013
By: Barry E. Haimo, Esq.
WHAT IS A CREDITOR AND WHY SHOULD I CARE?
In order to understand asset protection and business planning, you need to understand what a creditor is. A creditor is a person or entity to whom you owe money or property. They generally do not emerge until some type of event occurs. The nature of the event can be contractual, tortious and even criminal. Let’s break down the first two of them.
Contracts exist to provide people and businesses a degree of certainty, which they, in turn, can rely on to make promises themselves and so on and so forth. A break in the chain can cause damage where there was otherwise an expectation of performance. This may lead to the creation of a creditor.
With that in mind, any time you sign your name personally on a contract, you’re taking personal responsibility for the terms and obligations to which you’re agreeing. If you’re signing as a general partner in a limited partnership (LP) or general partnership (GP), you’re also personally liable. If you’re signing as an officer of a corporation or limited liability company (LLC), the business is most likely responsible. In either case, the interpretation of whether a term is in breach is beyond the scope of this post. Rest assured, however, that you are taking a risk of becoming a target to a creditor.
Let’s assume that you’ve committed a breach of your obligations either personally or as an entity. The other party will first threaten you before undoubtedly filing a claim and pursuing a judgment against you. Whether or not the other party files a claim is not necessarily a prerequisite for being characterized as a creditor. What matters is that they have been wronged, and they either are pursuing or intend to pursue an adequate legal remedy.
Examples of things you may have promised to do in a contract that may result in a creditor pursuing a claim against you:
- Pay rent
- Make mortgage payments
- Manufacture and/or deliver goods
- Perform services
Examples of contracts you may have signed may result in a creditor pursuing a claim against you:
- Residential and commercial leases
- Cable and internet
- Mobile phones
- Credit cards
- Service agreements
- Software development contracts
- Construction contracts
- Financial instruments (options, warrants)
Torts are civil “wrongs”. In a cause of action in tort, one party, the aggrieved or harmed party, called the plaintiff, sues the defendant to recover damages for the harm they experienced. There’s many types of torts, including intentional torts, negligence, strict liability, defamation/libel and violations of a person’s personal rights (name, likeness, image), right to privacy and publicity. If they are awarded damages, they become a creditor.
When a person or property harms another person or property with the intent to do so, it’s an intentional tort. They consist of battery, assault, false imprisonment, conversion and trespassing. They differ in the type of harm incurred and whether that harm is to a person or property. Regardless of which type of tort is committed, the aggrieved party will want to be made whole again. If they pursue or intend to pursue a judgment compelling the return of property or the payment of money, they have become a creditor.
Examples of actions that may result in a creditor pursuing a claim against you:
- Battery: hitting someone
- Assault: giving someone every reason to believe you’re about to hit them
- False Imprisonment: preventing someone from leaving an enclosed area in a reasonable manner
- Conversion: stealing or destroying someone’s personal property
- Trespass: being on the premises of the property that belongs to a person or entity
- Negligence: a person or entity is negligent if they fail to adhere to a reasonable standard of care, which directly results in harm to a person or property.
Examples of negligent actions or omissions that may result in a creditor pursuing a claim against you:
- A doctor that fails to use a readily available instrument to do a routine examination in making a diagnosis
- A person that texts and drives that causes injury to others
- A parking garage that fails to supply an adequate amount of light, which results in someone getting attacked; especially if the technology is available and other garages are providing such light
- Strict Liability: Strict liability is an area of law concerning highly dangerous instrumentalities, such as exotic animals or toxic chemicals. It also includes vicarious liability, which makes employers responsible for the tortuous acts of its employees. In either case, there’s a much lower standard of care if at all.
Defamation is any intentional false communication, either written or spoken, that harms a person’s reputation; decreases the respect, regard, or confidence in which a person is held; or induces disparaging, hostile, or disagreeable opinions or feelings against a person. Libel is the same definition, but the statement is in writing. If the statement is oral, it’s characterized as slander. If a claimant is victorious and recovers a judgment against you, they are a creditor.
Privacy, Publicity and Personal Rights
The right of publicity, often called personality rights, is a person’s right to control the commercial use of his or her name, image, likeness, or other unequivocal aspects of his or her identity. It is generally considered a property right as opposed to a personal right, and may, depending on the state, survive the death of the individual. Again, if a claimant is victorious and recovers a judgment against you, they are a creditor.
The above torts as well as a contractual breach may give rise to liability, which is enforced by a creditor. To protect yourself, you need to engage in asset protection planning. It should be regarded as playing defense in a very litigious world. It’s legal and it’s affordable. Why not take advantage for you and you family’s future.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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