Fintech
US trustee wants troubled fintech Synapse liquidated via Chapter 7 bankruptcy, cites ‘serious mismanagement’
The outlook for a struggling banking-as-a-service startup Synapses have gone from bad to worse this week after a U.S. trustee filed an emergency motion on Wednesday.
The trustee is seeking to convert the company’s bankruptcy under Chapter 11 debt reorganization into a Chapter 7 liquidation, according to court documents.
The trustee wrote that the need for Chapter 7 stemmed from “gross” mismanagement of its assets by Synapse, so that losses continued with little “reasonable probability of reorganization” that would allow the company to emerge from the other part and move forward.
This new development is significant because Synapse founder Sankaet Pathak said earlier this month that his former partners owe him millions, according to his own accounting, and aren’t paying. These partners insisted that Synapse’s allegations have “no merit.”
San Francisco-based Synapse, which operated a platform that allowed banks and fintech companies to develop financial services, was founded in 2014 by Bryan Keltner and Pathak. It provides these types of services as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, among others.
Synapse filed for Chapter 11 bankruptcy on April 22 and announced it at the same time the assets would be acquired by TabaPay.
But on May 9, TechCrunch reported that TabaPay’s $9.7 million purchase involved purchasing Synapse’s assets fell apart. At the time, Synapse said banking partner Evolve Bank & Trust was the problem. Evolve said it was not involved in the sale and was not at fault. Mercury also said that Synapse’s allegations that he was owed money “had no merit.”
But infighting between companies continued. On May 13, Evolve Bank & Trust filed a motion for an order restoring access to Synapse’s dashboard system after claiming it had been denied access to the startup’s computer systems and was forced to freeze its end user accounts.
The U.S. trustee said, according to court documents, that Synapse “inexplicably cut off access to its computer systems over a weekend.”
“Although there are disputes between the parties, there appears to be no reasonable explanation for the Debtor [Synapse] terminating access to its computer systems and indeed the Debtor has since stated that full access had been restored. There appears to be no doubt that these actions played a substantial role in causing end users to lose access to their funds. At a minimum, an independent trustee is needed to see if a solution can be reached that minimizes further harm to depositors. For all these reasons, the debtor has mismanaged the estate and there is ample reason to convert this case to Chapter 7.
Synapse admitted it had “no more money or approval to use money after Friday, May 17.”
A hearing on the U.S. trustee’s emergency motion is scheduled for May 17.
The hope remains that the proceedings can continue without further shenanigans. In a meeting of the creditors’ committee held on May 15, shared on LinkedIn by Jason Mikula of Fintech Business Weekly, “it has been suggested that Synapse’s fintech customers may provide some sort of financing to the company to allow it to continue operating in Chapter 11, presumably in an effort to resolve the disruption for end users.”
TechCrunch has reached out to Synapse for comment.
An Evolve spokesperson confirmed to TechCrunch that on May 11, “Evolve Bank & Trust faced an unexpected challenge when Synapse suddenly and without warning disabled our access to a Synapse-controlled and necessary account and transaction information dashboard. to Evolve. This sudden outage has significantly impacted our ability to maintain the visibility and transparency that Evolve requires in accounts and transactions. In response to this situation, Evolve has taken swift and decisive action to safeguard the security of end-user funds and ensuring compliance with applicable laws we made the difficult decision to suspend payment and card activity until we could successfully re-establish access to the dashboard and receive data and reports. necessary on your account and transactions. While we understand the inconvenience this may have caused, this step has been taken with the utmost consideration for the security and integrity of end user accounts. Evolve continues to work diligently to obtain the necessary information from Synapse.”
The spokesperson added that Evolve did not unblock this activity because “Synapse failed to provide the daily transaction and account information needed to process the transactions… The account freeze was a precautionary measure to minimize the risks to end users and Evolve this time, Evolve is unaware of the loss of end user funds due to Synapse denying access to Evolve’s dashboard.”
The previous purchase price of $9.7 million that TabaPay reportedly paid for Synapse’s assets is significantly lower than the more than $50 million in venture capital that Synapse had raised over time from investors such as Andreessen Horowitz, Trinity Ventures and Core Innovation Capital.