The prospects of a struggling banking-as-a-service startup Synapse went from bad to worse this week after a U.S. administrator filed an emergency motion on Wednesday.
The trustee is seeking to convert the company's debt restructuring Chapter 11 bankruptcy into a Chapter 7 liquidation, according to court documents.
The trustee wrote that the need for Chapter 7 resulted from the fact that Synapse had “grossly” mismanaged its estate, such that losses continued with little “reasonable likelihood of reorganization” that would allow the company to emerge from bankruptcy. 'other side and continue.
This new development is significant because Synapse founder Sankaet Pathak claimed earlier this month that his former partners owe him millions, according to his own accounting, and are not paying. These partners insisted that Synapse's allegations had “no merit.”
San Francisco-based Synapse, which operated a platform for banks and fintech companies to develop financial services, was founded in 2014 by Bryan Keltner and Pathak. It provided 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, at the same time, announced its the assets would be acquired by TabaPay.
But on May 9, TechCrunch reported that TabaPay's planned purchase of Synapse's assets for $9.7 million collapsed. At the time, Synapse said the problem was with its banking partner Evolve Bank & Trust. Evolve alleged that it was not involved in the sale and was not responsible. Mercury also claimed that Synapse's allegations that it was owed money had “no merit.”
But infighting between the companies continued. On May 13, Evolve Bank & Trust filed a motion seeking an order restoring access to Synapse's dashboard system after alleging that it was denied access to the startup's computer systems and that it had been forced to freeze end-user accounts.
The US attorney alleged, according to court documents, that Synapse “inexplicably cut off access to its computer systems over a weekend.”
“Although disputes exist between the parties, there appears to be no reasonable explanation why the Debtor (Synapse) cut off access to its computer systems and, indeed, the Debtor has since stated that full access had been restored. It seems indisputable that these actions played a significant role in end users losing access to their funds. At a minimum, an independent trustee is needed to see if a resolution can be reached that minimizes further harm to depositors. For all of these reasons, the debtor has grossly mismanaged the estate and there are many reasons to convert this case to Chapter 7.”
Synapse admitted that it “no longer had cash or permission to use cash after Friday, May 17.”
A hearing is scheduled for the U.S. Trustee's emergency motion on May 17.
It remains to be hoped that the procedure can continue without further shenanigans. At a meeting of the creditors' committee which took place on May 15, shared on LinkedIn According to Jason Mikula of Fintech Business Weekly, “it has been suggested that Synapse's fintech clients could provide some sort of financing to the company to allow it to continue operating in Chapter 11, likely in an effort to resolve 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 a dashboard of account information and transaction controlled by Synapse and necessary for Evolve. This sudden disruption has had a significant impact on our ability to maintain the visibility and transparency that Evolve requires across accounts and transactions. In response to this situation, Evolve has taken swift and decisive action to protect the security of end-user funds and ensure compliance with applicable laws. As a precautionary measure, we have made the difficult decision to freeze payments and card activity until we can successfully restore access to the dashboard and receive the necessary account and customer data and reporting. transactions. While we understand the inconvenience this may have caused, this action 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 unfreeze this activity because “Synapse failed to provide the daily transaction and account information needed to process transactions… Freezing the account was a precautionary measure aimed at minimizing risks to end users and to Evolve. At this time, Evolve is not aware of any loss of end user funds as a result of Synapse denying access to the Evolve dashboard.
The previous purchase price of $9.7 million that TabaPay was going to pay for Synapse's assets is significantly lower than the more than $50 million in venture capital that Synapse had raised from investors such as Andreessen Horowitz, Trinity Ventures and Core Innovation Capital over time.