Available at: https://scholarship.law.stjohns.edu/bankruptcy_research_library/374/
Abstract:
Section 506(a)(1) of title 11 of the United States Code (the "Bankruptcy Code") provides that a secured creditor's claim is "a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim." The valuation of collateral is determined "in light of the purpose of the valuation and of the proposed disposition or use of such property." However, the Bankruptcy Code is silent on which valuation method courts should employ.
The United States Court of Appeals for the Third Circuit noted in In re Heritage Highgate, Inc. that "Congress envisioned a flexible approach to valuation whereby bankruptcy courts would choose the standard that best fits the circumstances of a particular case." The Supreme Court elaborated in Associates Commercial Corp. v. Rash that the lower courts must evaluate the "actual" use of the property by the debtor in its valuation analysis.
This article analyzes the valuation of crypto currency mining assets under section 506(a)(1) in bankruptcy cases. The nature of crypto currency mining provides unique challenges in the valuation step. The mining process requires hundreds of sophisticated “miners,” potentially costing over $10,000 each, and requiring significant energy resources that are usually provided by individualized agreements with public and private utilities. Part I of this article discusses the valuation of special use property. Part II discusses potential valuation methods available to the court.
Commentary:
In what appears to be the first and only decision valuing cryptocurrency mining facilities under §506(a)(1), Bay Point Capital Partners v. Thomas Switch Holding—affirmed all the way to the Eleventh Circuit—the court classified the property as “special use” because of its substantial (15 MW) dedicated electrical infrastructure, lack of comparable properties, and limited alternative uses. That designation drove the choice of the cost approach over income or sales-comparison methods, with the court relying heavily on the testimony of an appraiser who actually defined “special use.” For practitioners, the lesson is clear: in cases involving unique, infrastructure-intensive collateral—whether crypto mines, data centers, or otherwise—the fight will be over the expert who gets to set the definitional terms, and once “special use” status is secured, the cost approach will often follow, producing a higher valuation for secured creditors and less for unsecureds.
Following a still largely untested idea from Billy Brewer, while crypto mining itself isn’t “producing” electricity, these facilities often operate under custom, high-capacity utility service agreements—sometimes with embedded rights, rate discounts, or infrastructure upgrades that are essentially inseparable from the property. If those agreements are characterized as energy transmission/distribution assets, that could bring the property within the scope of § 363(h)(4). Then even though § 363(h) allows a trustee to sell both the estate’s and a co-owner’s interest in property, if certain conditions are met, subsection (h)(4) prohibits the sale of jointly owned property if unless it “is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.”
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