The prospects for struggling banking-as-a-service startup Synapse dimmed this week after a U.S. trustee filed an emergency filing on Wednesday.
Court documents show that the trustee is in search of to convert the company’s bankruptcy from a Chapter 11 debt restructuring to a Chapter 7 liquidation.
The trustee wrote that the need for Chapter 7 resulted from Synapse’s “egregious” mismanagement of its assets, which resulted in continued losses with little “reasonable likelihood of a reorganization” that may enable the company to emerge on the other side and proceed as a going concern.
This latest development is significant because earlier this month, Synapse founder Sankaet Pathak claimed that his former partners owed him thousands and thousands according to their very own accounting and weren’t paying up. These partners insisted that Synapse’s allegations had “no merit.”
San Francisco-based Synapse, which operated a platform that allows banks and fintech corporations to develop financial services, was founded in 2014 by Bryan Keltner and Pathak. He provided the sort of services, among others: as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury.
On April 22, Synapse filed for Chapter 11 bankruptcy and concurrently announced the acquisition of its assets by TabaPay.
However, on May 9, TechCrunch reported that TabaPay’s planned $9.7 million purchase of Synapse assets had fallen through. Synapse then said the problem was banking partner Evolve Bank & Trust. Evolve claimed that it had no part in the sale and was not at fault for it. Mercury also said Synapse’s allegations of monetary debt “have no merit.”
However, internal conflicts between the corporations continued. On May 13, Evolve Bank & Trust filed a request for an order restoring access to its Synapse dashboard system after alleging that it was denied access to the startup’s computer systems and forced to freeze end-user accounts.
Court documents show that the US trustee alleged that Synapse “inexplicably cut off access to its computer systems over the weekend.”
“Although there are disputes between the parties, there appears to be no reasonable explanation for the Debtor [Synapse] cutting off access to its computer systems, and indeed the Debtor has since stated that full access has been restored. There seems to be no doubt that these activities played a significant role in end-users losing access to their funds. At a minimum, an independent trustee is needed to see whether a solution can be reached that minimizes further harm to depositors. For all these reasons, the Debtor has grossly mismanaged the estate and there are sufficient reasons to move this case to Chapter 7.”
Synapse admitted that after Friday, May 17, it “no longer has the cash or consent to use it.”
A hearing on the U.S. trustee’s emergency request is scheduled for May 17.
One can only hope that the proceedings can proceed without further madness. At the meeting of the creditors’ committee held on May 15, it was made available on LinkedIn by Fintech Business Weekly’s Jason Mikula “suggested that Synapse’s fintech customers could provide the company with some type of financing to enable it to continue operating in Chapter 11, possibly to remove 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 prior notice disabled our access to the account and transaction dashboard controlled by Synapse and needed by Evolve. This sudden disruption has significantly impacted our ability to maintain the visibility and transparency that Evolve needs across accounts and transactions. In response to this situation, Evolve has taken swift and decisive action to safeguard the security of end-user funds and ensure compliance with applicable regulations. 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 transaction data and reports. While we understand the inconvenience this may have caused, this step has been 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 didn’t unfreeze this activity because “Synapse did not provide the daily transaction and account information necessary to process the transactions… The account freeze was a precautionary measure intended to minimize risk to end users and to Evolve.” At this time, Evolve is not aware of any lack of any end-user funds as a results of Synapse denying access to the Evolve dashboard.”
The previous purchase price of $9.7 million that TabaPay was expected to pay for Synapse’s assets is significantly lower than the greater than $50 million in enterprise capital that Synapse has raised over time from investors corresponding to Andreessen Horowitz, Trinity Ventures and Core Innovation Capital.