The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after the United States Trustee filed an emergency motion on Wednesday.
The trustee is asking to convert the company’s debt reorganization Chapter 11 bankruptcy Synapse into a liquidation Chapter 7, according to court documents.
The trustee wrote that the need for Chapter 7 resulted from Synapse “grossly” mismanaging it’s estate so that losses were continuing with little “reasonable likelihood of reorganization” that would allow the company to emerge on the other side and carry on.
This new development is significant because Synapse founder Sankaet Pathak earlier this month has been alleging that its former partners owe it millions, by its own accounting, and were not paying up. While those partners have been insisting that Synapse’s allegations have “no merit.”
San Francisco-based Synapse, which operated a platform enabling banks and fintech companies to develop financial services, was founded in 2014 by Bryan Keltner and Sankaet Pathak. It was providing those 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 assets would be acquired by TabaPay.
But on May 9, TechCrunch reported that TabaPay’s $9.7 million planned purchase of Synapse’s assets fell apart. At the time, Synapse said the problem was banking partner Evolve Bank & Trust. Evolve alleged that it was not involved in the sale, and was not to blame. Mercury also claimed Synapse’s allegations of being owed money had “no merit.”
But the 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 on a weekend.”
“While disputes exist among 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 represented that full access has been restored. There appears to be no dispute that these actions have played a material 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 these reasons, the Debtor has grossly mismanaged the estate and ample cause exists to convert this case to chapter 7.”
Synapse admitted that it had “no more cash or approval to use any cash after Friday, May 17.”
A hearing is scheduled for the US Trustee’s emergency motion for May 17.
Hope remains that the proceedings could continue with no further shenanigans. In a creditor committee meeting took place on May 15, shared on LinkedIn by Fintech Business Weekly’s Jason Mikula, “it was suggested that fintech clients of Synapse might provide some kind of funding to the company to enable it to keep operating in Chapter 11, presumably in an attempt to resolve the disruption to end users.”
TechCrunch has reached out to Evolve and Synapse for comment.
The previous $9.7 million purchase price was significantly lower than the over $50 million in venture capital that Synapse had raised from investors such as Andreessen Horowitz, Trinity Ventures and Core Innovation Capital over time.