Greater Right to Possession of Seized Funds under Iowa Code §809.5: Bitcoin Depot v. Carlson

Introduction

In In the Matter of Property Seized for Forfeiture from Bitcoin Depot Operating, LLC v. Carrie Carlson, the Iowa Supreme Court resolved a dispute over $14,100 seized by the Linn County Sheriff’s Office from a Bitcoin ATM. Bitcoin Depot, the kiosk owner, sought return of the cash under Iowa Code § 809.5. Carlson, the customer who deposited the funds as part of a fraud scheme, intervened and claimed the right to restitution. The district court ordered the funds returned to Carlson. On appeal, the Supreme Court conducted a de novo review and reversed, holding Bitcoin Depot has the greater right to possession.

Summary of the Judgment

The seized cash was no longer needed for investigation or evidentiary purposes and no state forfeiture claim was filed.
Under Iowa Code § 809.5, seized property must be returned to the person with the superior right of possession.
Carlson argued the deposit contract was voidable for third‐party duress; Bitcoin Depot countered that it advanced value in good faith and had no reason to know of duress.
The Court found Bitcoin Depot transferred Bitcoins (value) in reliance on Carlson’s deposit and had no actual knowledge of the alleged scammer’s duress.
Relying on Restatement (Second) of Contracts § 175(2), the Court held Carlson could not void her contract, and thus Bitcoin Depot’s claim prevailed.
The district court’s order was reversed and the case remanded with instructions to return the funds to Bitcoin Depot.

Analysis

Precedents Cited

Homeland Energy Sols., LLC v. Retterath (Iowa 2020): Supported de novo review for equitable disputes over seized property.
Dorale v. Dorale (Iowa Ct. App. 2009): Applied Restatement § 175(2) to void conveyance contracts induced by third‐party duress when the other party knew of the duress.
Restatement (Second) of Contracts § 175(2): Voidability rule for contracts induced by non-party duress unless the counterparty gave value in good faith without reason to know of duress.
Federal and out-of-state decisions interpreting § 175(2): Aylaian v. Town of Huntington (2d Cir. 2012), McClain v. Warren (N.D. Ala. 2025), and Employees Ins. of Wausau v. Bond (D. Md. 1991) – confirming that value given in good faith shields a contract from being voidable.
Smart contract scholarship: Gerhardt & Thaw; Verstraete; Werbach & Cornell – cited by the district court but rejected by the Supreme Court for making contracts per se voidable.

Legal Reasoning

The Court first confirmed that Iowa Code § 809.5 requires return of seized property when no state forfeiture claim exists and the property is no longer needed for investigation. It then identified the competing claimants under subsection (2): “property which has been seized shall be returned to the person who demonstrates a right to possession.”

Bitcoin Depot’s right rested on its ownership of the ATM cash and its performance—advancing Bitcoins in exchange for the cash deposit. Carlson’s challenge invoked third-party duress: she asserted that a scammer compelled her to funnel money through the ATM. Under Restatement § 175(2), a contract induced by non-party duress is voidable by the victim unless the contracting partner (here, Bitcoin Depot) in good faith gave value without reason to know of duress or materially relied on the transaction.

The Court held:

Bitcoin Depot advanced value (Bitcoins) in good faith.
There was no evidence it had actual or constructive knowledge of Carlson’s duress—general warnings on ATMs did not supply particularized notice.
The district court’s pawnshop analogy failed because Bitcoin Depot is not a regulated pawnbroker, and the cash was never “stolen” from a third party.
Smart contracts are not immune from ordinary contract law, and generalized warnings do not prove knowledge of one user’s specific duress.

Having found no reason to void the contract, the Court concluded Bitcoin Depot has the superior right to the seized funds.

Impact

This decision clarifies several points for future cases:

Iowa Code § 809.5’s framework for return of seized property applies strictly to the person with the greater right, not necessarily the direct victim of underlying criminal activity.
Contracts for digital‐asset transactions remain subject to traditional contract doctrines, including third-party duress rules.
Generalized industry warnings (e.g., fraud alerts on ATMs) do not alone establish a party’s knowledge of a specific user’s duress or fraud.
Aggrieved users claiming duress must present evidence that the service provider had actual or constructive notice of their particular duress to void the underlying contract.
The case serves as a guidepost for digital‐asset operators, law enforcement, and courts on balancing fraud prevention, customer protection, and contract stability.

Complex Concepts Simplified

Third-Party Duress: When someone not party to a contract forces a contracting party to agree. Under Restatement § 175(2), the victim can void the contract unless the other party gave value in good faith without knowing of that duress.
Iowa Code § 809.5: Governs return of seized property when law enforcement no longer needs it, directing return to whoever has the superior legal right of possession.
Smart Contract: A code‐based agreement that executes automatically on a blockchain. Here, the Court held that smart contract transactions remain enforceable under ordinary contract law.
Voidable Contract: A contract valid on its face but may be set aside by one party due to legal defenses (like duress), subject to exceptions if the counterparty relied on it or gave value.

Conclusion

The Iowa Supreme Court’s ruling in Bitcoin Depot Operating, LLC v. Carlson establishes that, under Iowa Code § 809.5, return of seized funds hinges on traditional contract‐law rights of possession. It reinforces that generalized fraud warnings do not equate to knowledge of a particular user’s duress and that digital‐asset transactions remain governed by established legal principles. The decision will guide law enforcement, digital‐asset businesses, and litigants in navigating competing claims over seized property and in structuring transactions to manage fraud and contractual risk.