US Trustee Pushes for Chapter 7 Bankruptcy Liquidation of Troubled Fintech Synapse, Alleging 'Gross Mismanagement

The US Trustee is advocating for the Chapter 7 bankruptcy liquidation of troubled fintech company Synapse, citing allegations of "gross mismanagement." This move could have significant ramifications for Synapse's operations and investors. It underscores concerns about corporate governance and regulatory compliance within the fintech sector.

The outlook for troubled banking-as-a-service startup Synapse has deteriorated further this week following an emergency motion filed by a United States Trustee on Wednesday.

According to court documents, the trustee is seeking to convert Synapse's debt reorganization Chapter 11 bankruptcy into a liquidation Chapter 7.

The trustee cited Synapse's "gross mismanagement" of its estate, resulting in ongoing losses with little prospect of reorganization for the company to emerge successfully.

This development is significant, especially considering that earlier this month, Synapse founder Sankaet Pathak claimed that former partners owed the company millions, a claim disputed by the partners who insisted that Synapse's allegations had no merit.

Synapse, based in San Francisco and founded in 2014 by Bryan Keltner and Sankaet Pathak, operated a platform facilitating the development of financial services for banks and fintech companies. It acted as an intermediary between banking partner Evolve Bank & Trust and business banking startup Mercury, among others.

After filing for Chapter 11 bankruptcy on April 22 and announcing the acquisition of its assets by TabaPay, it was reported on May 9 that TabaPay's planned purchase of Synapse's assets, valued at $9.7 million, had fallen through. Synapse attributed the collapse of the deal to banking partner Evolve Bank & Trust, a claim refuted by Evolve, which asserted it was not involved in the sale and bore no responsibility. Mercury also denied Synapse's claims of being owed money, stating they had no merit.

The conflict between the companies escalated further on May 13 when Evolve Bank & Trust filed a motion to restore access to Synapse's dashboard system, alleging that it had been denied access to the startup's computer systems, leading to the freezing of end user accounts.

According to court documents, the U.S. Trustee criticized Synapse for inexplicably cutting off access to its computer systems over a weekend, resulting in end users losing access to their funds. Synapse admitted that it had no more cash or approval to use any cash after May 17.

A hearing on the U.S. Trustee's emergency motion is scheduled for May 17, with hopes that proceedings could continue without further disruptions. During a creditor committee meeting on May 15, there was discussion about fintech clients of Synapse potentially providing funding to enable the company to continue operating under Chapter 11, aiming to resolve the disruption to end users.

TechCrunch reached out to Synapse for comment, and an Evolve spokesperson confirmed that Evolve faced challenges when Synapse abruptly disabled access to an account and transaction information dashboard needed by Evolve. As a precautionary measure, Evolve froze payment and card activity until access was restored. The spokesperson emphasized that Evolve's actions were taken to safeguard end user funds and ensure compliance with laws.

Furthermore, Evolve stated that it has not unfrozen activity because Synapse failed to provide necessary daily transaction and account information. As a result, Evolve is not aware of any end user funds being lost due to Synapse's denial of dashboard access.

The previous planned purchase price of $9.7 million by TabaPay for Synapse's assets is significantly lower than the over $50 million in venture capital raised by Synapse from investors like Andreessen Horowitz, Trinity Ventures, and Core Innovation Capital over time.

Source: Techcrunch‍