BioGas Lenders Won Over Tort Claims with Economic Loss Doctrine

The North Carolina Business Court's decision in BioGas Corp. v. NC BioGas Dev. (2024 NCBC 75) reinforced the Economic Loss Doctrine as a critical defense for lenders seeking to limit liability in complex loan disputes. The case centered on a lender’s unconventional strategy to recover losses after a borrower defaulted on loans tied to biogas energy projects.

Key Case Details

1. Lender’s Strategy:

   • Instead of pursuing traditional foreclosure, the lender negotiated to purchase an unfinished biogas project (the Monroe Project) from the borrower.

   • This arrangement included contractual obligations for the lender to refurbish and manage the project.

2. Borrower’s Claims:

   • The borrower alleged the lender’s involvement in project management created a fiduciary relationship, opening the door to tort claims (e.g., breach of fiduciary duty, negligence) beyond contractual remedies.

3. Court’s Ruling:

   • The court dismissed tort claims under the Economic Loss Doctrine, ruling that harms arising from contractual obligations cannot be recast as tort claims.

   • Critical reasoning:

     • The purchase agreement explicitly governed the lender’s responsibilities, making contractual remedies the sole avenue for disputes.

     • No fiduciary duty existed because the lender’s actions remained within the scope of contractual agreements, lacking the "domination and influence" required for such a relationship.

Timeline of BioGas Corp. v. NC BioGas Dev., LLC

February 2023:
NC Biogas Development, LLC (NCBD) notifies BioGas Corp. that it is invoking its "step-in rights" under the loan agreements for the Monroe biogas project. These rights allow NCBD to take over development activities due to loan defaults.

March 2023:
BioGas Corp. and affiliates file a lawsuit challenging NCBD’s exercise of step-in rights and seeking declaratory and injunctive relief regarding the Monroe Project.

July 27, 2023:
Defendants file their answer and counterclaims, including breach of contract for nonpayment of the $150,000 NCBD Note and $55,000 Lensch Note, and breach of contract for refusal to honor step-in rights.

June 4, 2024:
NCBD files a motion for a temporary restraining order and preliminary injunction to prevent BioGas Corp. from entering new contracts about the Monroe Project without NCBD’s written consent.

June 12, 2024:
The Court enters a Consent Order enjoining BioGas Corp. and affiliates from entering any contract or agreement regarding the Monroe Project without first consulting and obtaining written consent from NCBD.

November 19, 2024:
Defendants file a motion for sanctions, alleging BioGas Corp. violated the Consent Order by entering into a financing agreement for the Monroe Project without required consent.

January 22, 2025:
The Court issues a Show Cause Order, requiring BioGas Corp. to explain why it should not be held in civil contempt for violating the Consent Order.

May 13, 2025:
The Court holds a show cause hearing to address the alleged violation of the Consent Order.

June 2–3, 2025:
The Court finds BioGas Corp., NC BioGas, LLC, and S. Anwar Shareef in breach of their agreement to pay the lenders as required under the Consent Order. Judgment is entered against them, jointly and severally, for $734,342.47 (covering the loan amounts, accrued interest, and a $410,000 incentive payment), plus interest after May 30, 202.

Source: nccourts.gov

What made this biogas project worth pursuing instead of just writing it off?

Loan Amounts for the Monroe Biogas Project

The loans specifically tied to the Monroe, North Carolina biogas project were as follows:

• NC Biogas Development, LLC (NCBD) loaned $150,000 (the "NCBD Note").

• Erik Lensch, an individual lender, loaned $55,000 (the "Lensch Note").

As of May 30, 2025, the court entered judgment for a total of $734,342.47 against BioGas Corp., NC BioGas, LLC, and Mr. Shareef. This sum includes the principal on both notes, accrued interest, and a $410,000 incentive payment triggered by one of the contracts.

Why the Biogas Project Was Worth Pursuing

Several factors made the Monroe biogas project—and similar projects in the portfolio—worth pursuing rather than simply writing off the loan:

• Potential for Repayment through Project Success: Biogas projects, if completed and operated successfully, can generate substantial and predictable cash flows by converting waste into energy (electricity, heat, or renewable natural gas). These cash flows can service debt and potentially repay the outstanding loans.

• Asset Value and Sale Opportunities: Even unfinished, such projects may retain significant value if sold to third parties or restructured.

• Strategic Investment and Sustainability Goals: Biogas projects align with broader trends in renewable energy and sustainability, making them attractive for ongoing investment, potential government incentives, and future profitability.

• Mitigating Losses: By stepping in to manage or acquire unfinished projects, lenders can potentially recover more than through foreclosure or liquidation, especially if the project can be completed and operated profitably or sold to a qualified operator15.

In summary, the combination of potential future revenue, ongoing market interest, and alignment with renewable energy trends made it rational for lenders to pursue completion or sale of the biogas project rather than simply writing off the debt.

Key Takeaways for Alternative Business Lenders

The BioGas case provides a legal shield (Economic Loss Doctrine) BUT only if your contracts are bulletproof and your workout procedures are disciplined. Creative collection strategies now carry higher legal risk—but also higher reward if done correctly. Below are suggestions:

CONTRACT LANGUAGE OVERHAUL

A. Step-In Rights Provisions (HIGH PRIORITY)

Recommended Language:

Step-In Rights: Upon [15] calendar days written notice following an Event of Default,

Lender may, at its sole discretion:

(i) Assume operational control of the Project as developer/manager
(ii) Receive market-based compensation for Project-related services
(iii) Retain the right to sell, assign, transfer, or dispose of the Project
(iv) Require Borrower to assign any third-party agreements relating to development activities
(v) Receive full cooperation from Borrower to ensure smooth transition without disruption

CRITICAL: The exercise of these rights shall be governed exclusively by this Agreement. Any damages arising from Lender's exercise of step-in rights shall be limited to those expressly provided herein.

Why This Works: The BioGas court dismissed tort claims because the contract clearly stated what the lender had to do. Your step-in language must be equally explicit.

B. Economic Loss Doctrine Protection Clauses

Add to ALL Loan Documents:

Economic Loss Limitation: Borrower acknowledges that all obligations, duties, and potential liabilities between the parties arise solely from this Agreement and related loan documents. Borrower waives any right to assert tort claims (including but not limited to negligence, breach of fiduciary duty, or interference claims) for any conduct that relates to or arises from the contractual relationship established herein.

C. Anti-Fiduciary Duty Language

Essential Addition:

No Fiduciary Relationship: The parties acknowledge that their relationship is solely that of lender and borrower. No fiduciary, partnership, joint venture, or similar relationship is created by this Agreement or Lender's exercise of any rights hereunder, including but not limited to step-in rights, operational control, or asset management activities.

D. Workout Protection Clauses

For Pre-Workout Agreements:

Workout Negotiations: During any workout discussions, negotiations, or forbearance periods:

(i) all existing defaults remain in effect;
(ii) all loan documents remain fully enforceable;
(iii) no new agreements are created except by signed, written amendment;
(iv) Lender's participation in discussions does not constitute a waiver of any rights or remedies.

DECISION TREE: WHEN TO PULL THE TRIGGER VS. GET CREATIVE

GO/NO-GO DECISION MATRIX:

Disclaimer: The information here includes general suggestions and advice. Please remember that these are just for informational purposes and should not be taken as professional guidance.

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