Bitcoins Are Not Dollars in Bankruptcy Court

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By Joyce E. Cutler

Feb. 25 — Bitcoins are not equivalent to dollars, a federal bankruptcy judge ruled in a case of first impression involving a bitcoin mining operation.

The ruling, while limited to a clawback motion involving a blogger paid to promote Hashfast Technologies LLC, is the first in a bankruptcy court to address the cryptocurrency for any purpose in a reported decision in the U.S., attorneys told Bloomberg BNA.

“The court does not need to decide whether bitcoin are currency or commodities for purposes of the fraudulent transfer provisions of the bankruptcy code. Rather, it is sufficient to determine that, despite defendant’s arguments to the contrary, bitcoin are not United States dollars,” Judge Dennis Montali of the U.S. Bankruptcy Court for the Northern District of California ruled in a two-page order filed Feb. 22.

“That’s the key here,” Cecily Dumas, a bankruptcy partner with Pillsbury Winthrop Shaw Pittman LLP in San Francisco, told Bloomberg BNA Feb. 24. “It’s not what not bitcoin is, is it a commodity or a currency. The big deal here is the date on which the property is transferred gets valued for purposes for what needs to be returned to the bankruptcy estate.”

Valuation Date Undecided

If and when the trustee prevails, the court will decide whether, under Bankruptcy Code Section 550(a), he may recover the bitcoin transferred or their value, and if the latter, valued as of what date, Montali said.

“What that would mean with appreciating property, whether it’s a painting, Google stock, Warriors tickets or bitcoin, ‘I’m going to give the trustee the upside,’ if you will. That’s bread and butter bankruptcy law,” Dumas told Bloomberg BNA.

The liquidating trustee’s summary judgment motion sought a court ruling that bitcoin aren’t currency for purposes of recovery under Section 550(a) and instead are a commodity “that, like any commodity, can rise or fall in value.”

Underlying Fraudulent Transfer Remains

Creditors filed an involuntary Chapter 7 petition against Hashfast, a San Francisco company that verified or mined the virtual bitcoin, which are traded in real time on exchanges across the globe.

Ron Oliner, a partner with Duane Morris LLP in San Francisco representing trustee Michael Kasolas, told Bloomberg BNA Feb. 24 the estate has yet to prove the underlying fraudulent transfer claim and is confident it can.

“But this ruling is we think extremely important for the bitcoin community because Judge Montali has clearly telegraphed that he does not view bitcoin as currency for bankruptcy purposes,” Oliner told Bloomberg BNA. “This means that the trustee can potentially recover the value of bitcoin as measured today, not what it was worth at the time the defendant received from Hashfast.”

Brian Klein, a partner with Baker Marquart LLP in Los Angeles representing defendant Marc Lowe, declined to comment.

Lowe in his opposition to summary judgment argued the bitcoin should be treated as a currency.

Fluctuating Bitcoin Value

Lowe, a California physician, was paid 300,000 bitcoin to blog promoting products made by Hashfast, which designed, developed, manufactured and sold computer chips and equipment, including semiconductors, for the sole purpose of auditing transaction data for the bitcoin networks, also known as “Bitcoin mining,” the adversary proceeding said.

The trustee seeks return of the value paid to Lowe to satisfy $40,754,674 in claims against the estate. The price of bitcoin increased significantly since Lowe was paid in September 2013, rising from a worth of $363,861 to $1.3 million as of the Feb. 19 hearing.

Grant Fondo, a partner with Goodwin Procter LLP in Menlo Park, Calif., said how bitcoin is treated, much like the digital currency itself, depends on the circumstances of the statute and regulation at issue and how the bitcoin is being used.

“Even how bankruptcy courts treat bitcoin may change under the circumstances of the issue before the bankruptcy court,” Fondo said in a Feb. 24 e-mail to Bloomberg BNA.

Commodity or Currency?

The court “treated virtual currency in a manner similar to how the IRS treats it: as property, not currency,” Peter D. Hardy, principal with Philadelphia’s Post & Schell P.C., said in an e-mail to Bloomberg BNA.

The Internal Revenue Service in March 2014 said bitcoins would be treated as property — not currency — for tax purposes and that it would be subject to the rules the IRS applies to stocks and barter transactions.

The Commodities Futures Trading Commission last September said for the first time that bitcoin and other “virtual currencies” come under the definition of commodities and are regulated under the Commodity Exchange Act .

Oliner, who’s represented trustees for 25 years, said “this is my first bitcoin case. I don’t know whether and when we’ll see other bitcoin mining enterprises in bankruptcy court, but to the extent that we now have a federal judge opining that bitcoin is more in the nature of a commodity than a currency, this seemingly will have a larger meaning in other litigations.”

The trustee is represented by Aron M. Oliner and Geoffrey A. Heaton, Duane Morris LLP, San Francisco. Marc Lowe is represented by Brian Klein, Baker Marquart LLP, Los Angeles, and David Poitras, Jeffer Mangels Butler & Mitchell LLP, Los Angeles.

To contact the reporter on this story: Joyce Cutler in San Francisco at jcutler@bna.com.

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com