The Journal

9th Circuit Denied Specific Recovery of Bitcoin in an Action for Conversion

Posted by Chris C. Han | Oct 01, 2021 | 0 Comments

For starter, Ox Labs is a cryptocurrency dealer headquartered in Los Angeles, California.

In July, 2015, Ox Labs unintentionally credited BitPay– a popular Bitcoin payment service– with 200 Bitcoins. Without Ox Labs' permission, BitPay quickly sold those bitcoins for a total of $57,000. In 2020, Ox Labs took BitPay to court over its inability to recover the bitcoins sold by BitPay at their current worth. The district court denied Ox Labs the current worth of its Bitcoins, and when Ox Labs appealed the district court's decision in May 2021, the verdict did not change.

BitPay had offered to reimburse Ox Labs the original worth of the bitcoins as they were in 2015: $57,000 for 200, making each bitcoin worth $285. However, at the time of the trial, one bitcoin had skyrocketed in worth to around $18,000. Ox Labs attempted to recover ~$3.6 million worth of bitcoin in this case.

There are a few important implications of this opinion.

  • First, the district upheld the principle that bitcoin is an “intangible property” that could not be specifically recovered to its worth at the time of recovery.
  • Second, damages were awarded to Ox Labs based on California default remedy – awarding damages equal to the property's value at the time of conversion.

Bitcoin is intangible property.

Based on the decision, Bitcoin is considered an “intangible” property. In addition, according to the United States Generally Accepted Accounting Principles, cryptocurrencies are not considered to be financial assets.

Because there is no physical substance associated with cryptocurrency, like cash, or evidence of ownership in a company, they are documented at the original price paid. This means that cryptocurrencies are not subject to specific recovery, or the ability to be recovered at current value as opposed to purchased value.

In the case of Ox Labs vs. BitPay, it was noted that

“specific recovery is unavailable when the converted property is intangible. One must distinguish between shares of stock, a person's intangible ownership interest in a company which cannot be [recovered], and the tangible certificates of stock which represent those shares and which can be [recovered]. Because the converted property here, cryptocurrency, is intangible, Ox Labs cannot specifically recover its Bitcoins from BitPay.”

Despite this decision, “The California Supreme Court has yet to decide whether Bitcoins can be specifically recovered in a conversion action.” But based on accounting principles and the law, specific recovery will likely not be granted to Ox Labs or anyone filing similar lawsuits.

Bitcoin was only created in 2009. Nobody could have predicted what kind of growth it would experience, and it still presents a very convoluted issue when taken to court.

The California Default Remedy Applies in OxLab v. BitPay

The court in this case between OxLab and BitPay applied the California default remedy in awarding damages to OxLab.

The court said that:

“[i]n California, the default remedy for conversion is to award damages equal to the value of the property at the time of conversion…Alternatively, courts may award damages sufficient to compensate a plaintiff for losses that are ‘natural, reasonable, and proximate result' of the conversion but ‘only where a determination of damages on the basis of value would be manifestly unjust.”

Essentially, by default, Ox Labs was entitled to compensation for the original value of their alleged lost Bitcoins. But the court has a window to award more if any damage or injury had resulted directly from their 2015 loss.

The court ruled that Ox Labs “did not show that it was ‘reasonably foreseeable that…damage would result from [BitPay's] conversion.'” No evidence that showed Ox Labs' intention to keep the Bitcoins past 2015, and therefore, no extra money was on the table. In other words, to award OxLab damages beyond the value of the Bitcoin at the time of conversion, which was in 2015 would “manifest unjust” under the circumstances and after all, the court said it was Ox Lab's own mistake to deposit the Bitcoin in BitPay's account. When BitPay “disclosed the error and offered to compensate Ox Labs for Ox Labs' own mistake,” Ox Labs declined the compensation and instead took BitPay to court over specific recovery. To that the court said:

“The applicable California law does not compel us to award a remedy that we have concluded would be manifestly unjust, given the massive increase in Bitcoin price…to the contrary, under California law the default remedy for such a conversion is to award damages equal to the property's value at the time of conversion.”

Therefore, based on intangible property and the California default remedy, Ox Labs did not receive any additional compensation outside of the $57,000 worth of the original 200 Bitcoins.

Downloaded the Opinion here.

About the Author

Chris C. Han

Founding & Managing Partner


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