The outlook for troubled banking startup Synapse has gone from bad to worse this week after a United States administrator filed for emergency relief on Wednesday.
The trustee is seeking to convert the company’s debt restructuring Chapter 11 bankruptcy into Chapter 7 liquidation, according to court documents.
The administrator wrote that the need for Chapter 7 arose from Synapse’s “gross” mismanagement of its assets, so that losses continued with little “reasonable possibility 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 claimed earlier this month that her former partners owed her millions, according to her own accounting, and that they were not paying. Those partners insisted that Synapse’s claims “have no merit.”
San Francisco-based Synapse, which operated a platform that enables 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 that its assets would be acquired by TabaPay.
But on May 9, TechCrunch reported that TabaPay’s planned $9.7 million purchase of Synapse’s assets fell through. 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 at fault. Mercury also claimed that Synapse’s claims that it was owed money had “no merit”.
But the infighting between the companies continued. On May 13, Evolve Bank & Trust filed a proposed order to restore access to Synapse’s dashboard system after it claimed it had been denied access to the startup’s computer systems and forced to freeze end-user accounts.
The US administrator claimed, according to court documents, that Synapse “inexplicably lost access to its computer systems over the weekend”.
“While there are disagreements between the parties, there does not seem to be a reasonable explanation for the Debtor [Synapse] cutting off access to his computer systems and indeed the debtor has since stated that full access has been restored. There seems little doubt that these actions played a significant role in end users losing access to their funds. At a minimum, an independent trustee is required to determine whether a solution can be reached that minimizes further harm to depositors. For all of these reasons, the debtor has grossly mismanaged the estate and there is ample reason to convert this case to chapter 7.”
Synapse admitted it “had no further cash or authorization to use cash after Friday 17 May”.
A hearing on the US administrator’s emergency motion is scheduled for May 17.
Still hoping the process could go ahead without further ado. In a meeting of the committee of creditors held on May 15, it was communicated to LinkedIn by Jason Mikula of Fintech Business Weekly, “it has been suggested that Synapse’s fintech clients may provide some sort of financing to the company to enable it to continue operating in Chapter 11, possibly in an effort to resolve the disruption to 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 abruptly and without prior notice disabled our access to a dashboard of account and transaction information controlled by Synapse and needed by Evolve. This sudden outage has significantly impacted our ability to maintain the visibility and transparency Evolve needs into accounts and transactions. In response to this situation, Evolve has taken swift and decisive action to ensure the safety of end user funds and ensure compliance with applicable laws. As a precautionary measure, we have made the difficult decision to freeze payment and card activity until we can successfully restore access to the dashboard, as well as obtain the necessary account and transaction data and reports. While we understand the inconvenience this may have caused, this step was taken with the utmost care 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 has not unfrozen this activity because “Synapse failed to provide daily transaction and account information necessary to process transactions… The account freeze was a precautionary measure to minimize risks to end users and for Evolve. At this time, Evolve is not aware of any loss of end user funds as a result of Synapse’s denial of access to Evolve’s dashboard.”
The previous $9.7 million purchase price TabaPay was set to pay for Synapse’s assets is significantly lower than the more than $50 million in venture capital Synapse had raised from investors including Andreessen Horowitz, Trinity Ventures and Core Innovation Capital over time.
