The outlook for troubled banking-as-a-service startup Synapse worsened this week after the U.S. Trustees filed an emergency motion Wednesday.
According to court documents, the trustee is seeking to change the company's Chapter 11 bankruptcy synapse to Chapter 7 liquidation.
The need for Chapter 7 is due to the fact that Synapse has “grossly” mismanaged its assets, sustained losses, and that there is no “reasonable restructuring plan” that would allow the company to rebuild and continue operating, the trustees said. He wrote that it arose from the fact that there was almost no possibility of it happening.
The new development is significant because Synapse founder Sankaet Pathak earlier this month claimed that the company's former partners owed millions of dollars in their own accounts and had not repaid them. be. Meanwhile, these partners maintain that Synapse's claims are “without merit.”
San Francisco-based Synapse operates a platform that enables banks and fintech companies to develop financial services and was founded in 2014 by Bryan Keltner and Sankaet Pathak. The company offered this type of service as an intermediary between banking partners such as his Evolve Bank & Trust and business banking startup Mercury.
Synapse filed for Chapter 11 bankruptcy protection on April 22, and at the same time announced that its assets would be acquired by TabaPay.
However, on May 9, TechCrunch reported that TabaPay's plan to acquire Synapse assets for $9.7 million fell through. At the time, Synapse said the problem was with its banking partner Evolve Bank & Trust. Evolve maintained that it was not involved in the sale and was not responsible. Mr Mercury also claimed that Mr Synapse's claims that it owed money had “no basis”.
However, internal conflicts between the two companies continued. On May 13, Evolve Bank & Trust filed a motion seeking an order restoring access to Synapse's dashboard system, alleging that it was denied access to Synapse's computer systems and forced to freeze end user accounts. did.
According to court documents, the U.S. trustee claimed that Synapse “inexplicably cut off access to its computer systems over the weekend.”
“Although there is a dispute between the parties, there appears to be no reasonable explanation for the debtor.” [Synapse] Access to the computer system was cut off and, in fact, the debtor indicated that full access had since been restored. There appears to be no dispute that these actions played a significant role in end users losing access to their funds. At the very least, an independent trustee is needed to see if a solution can be reached that minimizes further harm to depositors. For all of these reasons, the debtor has grossly mismanaged its estate and there is good reason to convert this case to Chapter 7. ”
Synapse confirmed that it had “no cash remaining and no authorization to use cash since Friday, May 17th.”
A hearing on the U.S. Trustee's emergency motion is scheduled for May 17.
There remains hope that the case will proceed without further shenanigans. Fintech Business Weekly's Jason Mikula shared on LinkedIn that at the May 15 creditors committee meeting, “Synapse's fintech customers agreed to allow the company to continue operating in Chapter 11. It was suggested that there may be some funding available for this purpose, perhaps to resolve the confusion for end users.
TechCrunch has reached out to Evolve and Synapse for comment.
The previous purchase price of $9.7 million was significantly lower than the more than $50 million in venture capital Synapse had raised over time from investors including Andreessen Horowitz, Trinity Ventures and Core Innovation Capital.