A US Trustee Wants Troubled Fintech Company Synapse to Be Liquidated Through Chapter 7 Bankruptcy, Citing 'gross Mismanagement' | TechCrunch - Latest Global News

A US Trustee Wants Troubled Fintech Company Synapse to Be Liquidated Through Chapter 7 Bankruptcy, Citing ‘gross Mismanagement’ | TechCrunch

The outlook for troubled banking-as-a-service startup Synapse deteriorated even further this week after the U.S. trustee filed an emergency motion on Wednesday.

According to court documents, the trustee is seeking to convert the company’s Chapter 11 debt restructuring of Synapse bankruptcy into a Chapter 7 liquidation.

The trustee wrote that the need for Chapter 7 was due to Synapse’s “gross” mismanagement of its estate, such that losses continued and there was little “reasonable probability of a reorganization” that would allow the company to continue on the business to emerge from the other side and move on.

This new development is significant as Synapse founder Sankaet Pathak claimed earlier this month that his former partners say they owe him millions and are failing to pay them. While these partners have insisted that Synapse’s claims 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 Sankaet Pathak. The company provided these types of services, among other things, as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury.

Synapse filed for Chapter 11 bankruptcy on April 22 and simultaneously announced the acquisition of its assets by TabaPay.

But on May 9, TechCrunch reported that TabaPay’s planned $9.7 million purchase of Synapse assets fell through. At the time, Synapse said the problem was with its banking partner, Evolve Bank & Trust. Evolve claimed it had no involvement in the sale and was not at fault. Mercury also claimed that Synapse’s claims that it was owed money were “unfounded.”

But the power struggle between the companies continued. On May 13, Evolve Bank & Trust filed a motion for an order restoring access to Synapse’s dashboard system after claiming it was denied access to the startup’s computer systems and forced to freeze end-user accounts .

The U.S. trustee alleged that Synapse “inexplicably interrupted access to its computer systems over a weekend,” according to court documents.

“Although there are disputes between the parties, there appears to be no reasonable explanation for the debtor [Synapse] has blocked access to its computer systems and, in fact, the debtor has since stated that full access has been restored. It seems undisputed that these measures have played a significant role in end users losing access to their funds. At a minimum, an independent fiduciary is required to assess whether a solution can be found that minimizes further harm to depositors. For all of these reasons, the debtor has grossly mismanaged the estate and there are sufficient grounds to convert this case to Chapter 7.”

Synapse admitted that it “ran out of cash or was no longer authorized to use cash after Friday, May 17.”

A hearing on the U.S. trustee’s emergency request is scheduled for May 17.

It remains to be hoped that the process can continue without further shenanigans. In a May 15 meeting of the creditors’ committee, shared by Fintech Business Weekly’s Jason Mikula on LinkedIn, “it was suggested that Synapse’s fintech customers could probably provide some form of financing to the company to continue its operations in Chapter 11 may continue in an attempt to resolve the issue for end users.”

TechCrunch has reached out to Evolve and Synapse for comment.

The previous purchase price of $9.7 million was significantly lower than the more than $50 million in venture capital that Synapse had raised over time from investors such as Andreessen Horowitz, Trinity Ventures and Core Innovation Capital.

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