Update: Synapse Bankruptcy Trustee Seeks Chapter 7 or Dismissal

The end might be near for the Synapse bankruptcy case. Jelena McWilliams, the court-appointed Chapter 11 trustee has formally requested the U.S. Bankruptcy Court for the Central District of California to convert the Chapter 11 case to Chapter 7 or, alternatively, dismiss it. The motion filed Friday, June 6, highlights the estate’s lack of funds, the failure of asset sale efforts, and the significant challenges in addressing the remaining issues, including a shortfall in end user funds.

Synapse, which first filed for Chapter 11 bankruptcy on April 22, 2024, with the initial aim of selling its assets. However, a proposed $9.7 million sale to TabaPay Holdings failed in May 2024 after a settlement could not be reached with Evolve Bank & Trust regarding end user funds. Disputes over ledger discrepancies and fund handling with other partner banks escalated, resulting in frozen accounts and end users losing access to their money.

McWilliams’ primary focus has been reconciling accounts and facilitating the return of money to end users. While most of the approximately $219 million held by partner banks as of May 2024 has reportedly been distributed, an apparent shortfall of $65 million to $95 million between funds held and amounts recorded on Synapse’s ledger persists. With no backing regulatory agency behind it or available budgets, McWilliams lacks the resources to further investigate the exact cause or amount of this shortfall.

“As discussed in previous status reports submitted by the Trustee, it appears that some End Users still have not received their expected amount of funds and that a shortfall between the amount of funds held at some Partner Financial Institutions and funds expected to be held based on the Synapse ledger existed prior to Synapse’s bankruptcy,” McWilliams wrote in her latest status report. “Due to the many difficulties in accurately accounting for money movements and the immense complexity of any reconciliation, the exact amounts and sources of the shortfall have not been clearly established.”

No Sale

Attempts to sell Synapse technology assets have been unsuccessful, with no qualified bids received. These assets, according to the status report, are difficult to value, costly to maintain, and their value has diminished. Potential causes of action against third parties exist, and secured creditors, including First Citizens Bank and TriplePoint Capital, hold liens on substantially all assets, with claims totaling about $8.7 million, likely exceeding the value of remaining assets.

McWilliams argues that “cause” exists for conversion or dismissal due to substantial loss and diminution of the estate and the absence of a reasonable likelihood of rehabilitation. The estate has no funds for ongoing operations, asset maintenance, or pursuing claims. Determining the “best interests of creditors and the estate” is the second step for the court.

Conversion to Chapter 7 would allow for final administration and potentially a streamlined sale of assets or claims by a Chapter 7 trustee. A counterparty’s Chapter 11 filing signals continued engagement (subject to court-approved terms and critical-vendor motions), while a Chapter 7 filing signals time to quantify collateral, file proofs of claim, and prepare for write-offs.

Alternatively, dismissal might expedite secured creditors’ recovery through foreclosure. However, if dismissed, McWilliams seeks court authorization to destroy sensitive remaining records and data, including personally identifiable information, as there is no custodian to manage ongoing privacy obligations.

The motion, filed by counsel from McWilliams’ firm Cravath, Swaine & Moore, also seeks removal for McWilliams, acknowledging their work despite a lack of compensation from Synapse. The court is also asked to retain jurisdiction post-dismissal to enforce orders.