Lenders have likely encountered situations where borrowers push back against collection efforts.
Sometimes, they may even accuse you of causing them harm through negligence, breach of contract, or even breach of fiduciary duty. While the typical borrower-lender relationship doesn't create a fiduciary duty, certain actions might inadvertently change that dynamic and expose you to additional liability.
Fortunately, legal defenses exist to protect lenders in these situations. One powerful tool is the Economic Loss Doctrine, which was recently highlighted by the North Carolina Business Court.
In BioGas Corp. v. NC BioGas Dev., a lender provided funding for several biogas projects. When the borrower defaulted, the lender took an unconventional approach: instead of foreclosing immediately, they negotiated to purchase one of the unfinished projects. This creative strategy didn't work out as planned. The project was in terrible condition, and despite significant efforts, the lender couldn't make it profitable or find another buyer. The relationship deteriorated further, eventually leading to litigation.
The borrower made an interesting argument: because the lender took control of the project in what resembled a partnership arrangement, they had created a fiduciary relationship. In legal terms, a fiduciary relationship forms when one party places "special confidence" in another, requiring that party to act in good faith. This is a tort claim and borrowers assert them because, if proven, they may be able to recover damages – including legal fees and expenses – beyond what is available under the loan documents.
For a fiduciary relationship to exist, there must be more than a standard debtor-creditor relationship—one party must exercise "domination and influence" over the other. In this case, the new contractual arrangement potentially created such a relationship.
But the Business Court ruled in favor of the lender based on the Economic Loss Doctrine. In North Carolina, this doctrine prevents parties from bringing tort claims (like negligence or breach of fiduciary duty) for damages that arise from a breach of contract. The reasoning is straightforward:
- If the harm is already covered by the contract, parties shouldn't be able to add extra tort claims based on the same issues.
- Any tort claim must be separate and distinct from the contractual obligations.
In the BioGas case, the purchase agreement clearly stated that the lender had to complete the refurbishment of the project. Since the alleged harm was directly related to these contractual obligations, the Court dismissed the tort claims.
When dealing with troubled loans, remember that borrowers often respond with creative legal theories to avoid payment. While some claims may seem baseless, the specific facts of your lending relationship and the actions you take can make a significant difference. On the flip side, lenders should be careful with their own creative strategies to get repaid on their loans. Engaging in conduct outside of traditional remedies like foreclosure and repossession comes with risks.
BioGas highlights the importance of contractual terms, which courts are duty-bound to enforce. Whatever agreements you enter into will ultimately govern the relationship and potential liability. While you can't prevent borrowers from making claims against you, remember that the Economic Loss Doctrine should be available to knock out tort claims and limit your potential exposure.
