The Chapter 11 trustee for Synapse Financial Technologies has filed a motion to convert the bankruptcy case to Chapter 7 liquidation or dismiss it entirely, marking what could be the final chapter for the once-promising fintech infrastructure company that facilitated banking services between traditional banks and fintech startups.
In a motion filed Wednesday with the U.S. Bankruptcy Court for the Central District of California, Chapter 11 trustee Jelena McWilliams stated that the estate lacks the resources to continue pursuing asset sales or investigating potential claims after months of efforts failed to generate viable bids for the company's technology platform.
"The estate has no funds to support a sale process for any assets or to investigate and pursue any claims with potentially recoverable value," McWilliams stated in the filing. "The Technology Assets have not produced significant buyer interest, are difficult to value, are costly to maintain and have suffered significant diminution in value over the course of the Case."
Synapse, which filed for bankruptcy protection on April 22, 2024, provided technology that enabled banking and payment solutions between insured depository institutions and non-bank financial technology businesses. The company's system formed a network connecting fintech companies, partner banks, and end users, allowing financial transactions to take place through its ledger technology.
According to court documents, the bankruptcy case began with hopes of selling substantially all assets to TabaPay Holdings for $9.7 million, but that deal collapsed when Synapse failed to reach a settlement with one of its banking partners, Evolve Bank & Trust. Disputes between Synapse, Evolve, and other partner financial institutions regarding reconciliation issues ultimately resulted in accounts being frozen and end users losing access to their funds.
Perhaps most significantly, the trustee's filing revealed a substantial discrepancy between funds recorded in Synapse's ledger systems and actual funds held by partner financial institutions. Partner banks reported holding approximately $219 million in end user funds, but reconciliation efforts uncovered an apparent shortfall ranging from $65 million to $95 million between actual funds held and what should have been available based on Synapse's records.
"Due to the lack of resources in the Debtor's estate and certain Partner Financial Institutions refusal to provide reconciliation and distribution data on a voluntary basis, the Trustee has been unable to independently ascertain the exact amounts of a potential shortfall," the motion stated.
Despite these challenges, McWilliams' team managed to facilitate the reconciliation process that allowed partner financial institutions to distribute the vast majority of the $219 million back to end users. The trustee noted that this achievement fulfilled the court's directive to reconcile end user accounts, but further investigation into the source and exact amount of the shortfall would require "significant time, money and effort" that the estate simply doesn't have.
The filing also revealed that Synapse has two secured loans: approximately $1.5 million owed to Silicon Valley Bank (now First Citizens Bank) and about $7.2 million owed to TriplePoint Capital. These secured creditors have liens on substantially all of the debtor's assets that likely significantly exceed the value of the remaining assets, according to the trustee.
After attempting to sell the company's technology assets through a court-approved bidding process that concluded in November 2024, the trustee received no qualified bids by the deadline. "The sale process has not led to any actionable bids, and the estate has no funds to pay expenses already incurred in relation to the sale process or to take on additional expenses to further meaningfully pursue a sale process," McWilliams stated.
If the case is dismissed rather than converted to Chapter 7, the trustee is seeking authorization to destroy Synapse's remaining records and data, which contain personally identifiable information and other sensitive customer data, to comply with privacy laws. The trustee noted that "leaving the Remaining Records and Data without a custodian may result in unintentional breaches of privacy law or otherwise leave personal information subject to unauthorized access."
The motion also seeks exculpation for McWilliams and her retained professionals, who have continued working despite the estate's inability to pay for their services.
The case is being heard by Judge Martin Barash in the U.S. Bankruptcy Court for the Central District of California, San Fernando Valley Division, case number 1:24-bk-10646-MB. The trustee is represented by Cravath, Swaine & Moore LLP and Keller Benvenutti Kim LLP.
This article was prepared using Stretto Conductor, our new AI-powered assistant that's here to help. Stretto Conductor was able to create this summary of a 19 page court filing in less than a minute. Always review the underlying docket filings for accurate information. The information and responses generated by Stretto Conductor may contain errors or inaccuracies and should not be relied upon as a substitute for professional or legal advice.