Bitcoin Mining Property may be “Special Purpose Property” in Bankruptcy: The Eleventh Circuit Court’s Decision on Bay Point Capital v. Thomas Switch Holding

Michael Galletti

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In Bay Point Capital Partners II, LP v. Thomas Switch Holding, LLC (In re Virtual Citadel, Inc.), the Eleventh Circuit Court of Appeals evaluated a bankruptcy court’s decision regarding the valuation of a bitcoin mining property.[1]The Court addressed three key issues: (1) whether the mining property should be classified as a “special purpose property” with bitcoin mining as its highest and best use; (2) whether the bankruptcy court selected the appropriate method to value the property; and (3) whether the tax stamp value should have been considered in the final valuation.[2]Ultimately, the Court affirmed the bankruptcy court’s decision, upholding the valuation approach and reasoning employed by the lower courts.[3]

Michael Oken (“Oken”) owned a bitcoin mining operation and a data storage center on adjacent properties in Georgia.[4] The property at the center of this case—a one-acre plot—was originally purchased for $50,000.[5] Oken invested millions in infrastructure improvements, including electrical capacity upgrades necessary for bitcoin mining.[6]Bitcoin mining is power-intensive, and Oken secured a Power Sales Agreement with the City of College Park to provide fifteen megawatts of electricity at a low cost, resulting in millions in annual savings.[7] After Oken’s death, his businesses filed for relief under chapter 11 of the Bankruptcy Code in 2020.[8]

The bankruptcy estate sold the mining and data center properties together for $4.9 million with the deed assigning $2.45 million in value to each property.[9] Thomas Switch Holding (“Mining Property Lienholder”) held a first-priority lien on the mining property, while Bay Point Capital (“Business Assets Lienholder”) had a lien on the other business assets.[10] The bankruptcy court placed $700,000 from the sale proceeds in escrow, pending the court’s decision on whether the property was a special purpose property.[11] If the mining property’s value exceeded $700,000, Mining Property Lienholder would receive the full amount.[12] If it was less, Business Assets Lienholder would receive the difference.[13]

The lienholders submitted dueling appraisals for the mining property, and the bankruptcy court endorsed Mining Property Lienholder’s appraiser’s approach, classifying the mining property as a “special purpose property.”[14] This classification relied heavily on the fact that the mining property’s unique infrastructure investments, particularly its electrical capacity, made it valuable as a bitcoin mining facility. Additionally, the absence of comparable properties supported using the cost approach (proposed by the Mining Property Lienholder’s appraiser) over the sales comparison approach (proposed by the Business Assets Lienholder’s appraiser).[15] The bankruptcy court also considered the tax stamp value of $2.45 million however, it acknowledged that this value did not hold much weight because it was likely attributed out of convenience as it was half of the total sales price.[16]

Business Assets Lienholder appealed to the district court, which affirmed the bankruptcy court.[17] Business Assets Lienholder then appealed to the Eleventh Circuit Court of Appeals, which affirmed the bankruptcy court’s judgment, finding no errors in its classification of the property, the chosen valuation method, or the consideration of the tax stamp value.[18]

The Court supported the bankruptcy court’s decision to classify the property as a special purpose property, with bitcoin mining as its highest and best use.[19] The Court noted that the classification of a property’s highest and best use requires considering its most profitable and likely use.[20] Here, the significant electrical upgrades that made the property suitable for bitcoin mining were central to its valuation.[21] The purchaser’s decision to continue using the property for bitcoin mining reinforced this conclusion.[22] The Court emphasized that the property had been specifically improved to mine bitcoin, including the installation of transformers and other electrical infrastructure.[23] These improvements made the property unsuitable for other industrial uses without further costly modifications.[24] Thus, to treat the property as a generic industrial site would ignore the millions invested in bitcoin mining infrastructure.[25] The Court agreed with the bankruptcy court’s conclusion that a specialized property like this, with no comparable properties available, warranted a distinct valuation method.[26]

The Court disagreed with the Business Assets Lienholder’s challenge to the bankruptcy court’s decision to apply the cost approach, arguing that the sales comparison approach was more appropriate.[27] The Court recognized that the Bankruptcy Code allows for flexibility in selecting a valuation method, particularly when there are no comparable sales.[28] The Court held that the cost approach, which estimates the expense of replicating the property, was more appropriate in this case given the lack of comparable properties that had the capacity to support bitcoin mining.[29]

The Court found that the cost approach properly reflected the value of the property’s infrastructure upgrades, which had been specifically tailored to its use as a bitcoin mining facility.[30] The Court held that because the Business Asset’s appraiser’s sales comparison failed to find relevant comparisons, the bankruptcy court was justified in dismissing it in favor of a method that recognized the unique features of the property.[31] The Court reiterated that the purpose of the property—to continue bitcoin mining—was central to its valuation, consistent with the debtor’s intended use and the purchaser’s plans.[32]

Finally, the Business Assets Lienholder argued that the bankruptcy court placed too much weight on the $2.45 million tax stamp value, which was likely a reflection of the overall sale price being split between the mining and data properties.[33] While the Court agreed that the tax stamp value was likely assigned for convenience, it found no error in the bankruptcy court’s decision to consider it.[34] The tax stamp value was not the sole basis for the property’s valuation but was an additional factor that supported the conclusion that the property was worth more than $700,000.[35] The Court reasoned that while the tax stamp was not determinative, it bolstered the plausibility of the valuation, as assigning a value over three times lower than the tax stamp would be illogical in light of the buyer’s continued use of the property for bitcoin mining.[36]

The Court’s decision in Bay Point Capital vs. Thomas Switch Holdings reaffirms the flexibility bankruptcy courts have in selecting valuation methods tailored to the specific circumstances of each case.[37] The classification of the bitcoin mining property as a special purpose property and the application of the cost approach were both deemed appropriate given the unique infrastructure and lack of comparable properties.[38] Additionally, the Court confirmed that tax stamp values, while secondary, could reasonably be considered in valuation decisions.[39] Ultimately, the decision underscores the importance of a property’s intended use and its specialized nature when determining its value in bankruptcy proceedings.