The prospects for a startup with banking-as-a-service problems Synapse have gone from bad to worse this week after a U.S. trustee filed an emergency motion Wednesday.
The trustee is requesting to convert the company’s debt reorganization under Chapter 11 bankruptcy to a Chapter 7 liquidation, according to court documents.
The trustee wrote that the need for Chapter 7 was because Synapse “severely” managed its assets, such that losses continued with little “reasonable likelihood of reorganization” that would allow the company to emerge on the other side and continue.
This new development is significant because Synapse founder Sankaet Pathak alleged earlier this month that his former partners owe him millions, according to his own accounting, and were not paying. Those partners have been insisting that Synapse’s allegations are “baseless.”
San Francisco-based Synapse, which operated a platform that enabled banks and fintech companies to develop financial services, was founded in 2014 by Bryan Keltner and Pathak. It provided such 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, at the same time, announced its The assets would be acquired by TabaPay..
But on May 9, TechCrunch reported that TabaPay’s planned $9.7 million purchase of Synapse assets She fell apart. At the time, Synapse said the problem was banking partner Evolve Bank & Trust. Evolve claimed it was not involved in the sale and was not to blame. Mercury also claimed that Synapse’s allegations that it was owed money were “baseless”.
But infighting between the companies continued. On May 13, Evolve Bank & Trust filed a motion for an order restoring access to Synapse’s dashboard system after alleging that it had been denied access to the startup’s computer systems and had been forced to freeze end user accounts.
The U.S. trustee alleged, according to court documents, that Synapse “inexplicably cut off access to its computer systems over a weekend.”
“While there are disputes between the parties, there does not appear to be a reasonable explanation for the Debtor [Synapse] cutting off access to its computer systems and, in fact, the Debtor has since stated that full access has been restored. There seems to be no doubt that these actions have played a significant role in end users losing access to their funds. At a minimum, an independent fiduciary is needed to see if a resolution can be reached that minimizes further harm to depositors. For all of these reasons, the Debtor has seriously mismanaged the estate and there is ample cause to convert this case to chapter 7.”
Synapse admitted that it “had no more cash or approval to use cash after Friday, May 17.”
A hearing for the United States Trustee’s emergency motion is scheduled for May 17.
It remains to be hoped that the process can continue without further shenanigans. At a creditors committee meeting that took place on May 15, he shared in LinkedIn According to Jason Mikula of Fintech Business Weekly, “it was suggested that Synapse’s fintech clients could provide some form of financing to the company to allow it to continue operating in Chapter 11, presumably in an attempt to resolve the disruption for end users.”
TechCrunch has contacted Synapse for comment.
An Evolve spokesperson confirmed to TechCrunch that on May 11, “Evolve Bank & Trust faced an unexpected challenge when Synapse abruptly and without notice disabled our access to an account and transaction information dashboard controlled by Synapse and necessary for Evolve. This sudden outage significantly impacted our ability to maintain the visibility and transparency that Evolve needs across accounts and transactions. In response to this situation, Evolve took swift and decisive action to safeguard the security of end-user funds and ensure compliance with applicable laws. As a precautionary measure, we made the difficult decision to freeze payments and card activity until we could successfully restore access to the dashboard, as well as receive the necessary account and transaction data and reports. While we understand the inconvenience this may have caused, this step was taken with the utmost consideration for the security and integrity of end users’ accounts. “Evolve continues to work diligently to obtain the necessary information from Synapse.”
The spokesperson added that Evolve has not unfrozen this activity because “Synapse has not provided the daily transaction and account information that is necessary to process transactions…The account freeze was a precautionary measure to minimize risks to end users and for Evolution. At this time, Evolve is not aware of any end-user funds being lost as a result of Synapse denying you access to the Evolve dashboard.”
The previous $9.7 million purchase price that TabaPay was set to pay for Synapse’s assets is significantly lower than the more than $50 million in venture capital that Synapse had raised from investors including Andreessen Horowitz, Trinity Ventures and Core Innovation Capital over time.