Frozen Funds Still Unresolved as Synapse Bankruptcy Nears Conclusion

The protracted Synapse Financial Technologies bankruptcy is nearing its final stages with a whimper rather than a bang. Late last week (April 10) Trustee Jelena McWilliams filed a status report with the Central California Bankruptcy Court that laid the ground for dismissal or conversion of the case to Chapter 7. McWilliams stated in the report that she “will conclude necessary estate administration activities and intends to file a motion seeking dismissal of this Case or, in the alternative, conversion of this Case to Chapter 7, as appropriate.”

“Due to the significant costs and complexities of maintaining and interpreting Synapse’s data and systems and the lack of estate resources, the Trustee and her professionals have wound down estate reconciliation activities,” the report states.

Before its bankruptcy woes, Synapse connected other FinTech firms with banks, storing customers’ money for those startups. At its peak, the company was managing billions of dollars, and when it collapsed in April 2024, thousands of people were locked out of their accounts.

A court-appointed mediator later revealed that up to $96 million in customer funds managed by Synapse could be missing, with some people saying the collapse has cost them their life savings.

Chapter 7 vs. Chapter 11

Chapter 7, often referred to as “liquidation bankruptcy,” involves the sale of a company’s non-exempt assets to repay creditors, typically resulting in the cessation of business operations. In contrast, Chapter 11 is a “reorganization bankruptcy,” allowing businesses to continue operating while restructuring their debt under court supervision. This process involves proposing a plan to creditors and the court to emerge as a viable entity. While Chapter 7 offers a swift resolution, Chapter 11 provides a pathway for companies to revamp their financials and potentially regain profitability, making it a preferred choice for businesses seeking to maintain operations and avoid complete dissolution.

However, Chapter 11 seems to be an untenable option. McWilliams’ report served as a summary of her efforts since her appointment on May 24, 2024. These actions have primarily focused on the complex task of reconciling and releasing funds to end users, preserving essential data, and exploring potential asset sales.

Regarding the release of end-user funds, the report indicates that partner banks have disbursed the “vast majority” of the $219 million frozen in May 2024. This process is ongoing, with partner banks continuing to address reconciliation findings, confirm payment instructions, and reprocess failed payments. However, a critical issue remains: a pre-bankruptcy shortfall between the funds held at some partner banks and the amounts recorded in the Synapse ledger. This discrepancy has resulted in many end users not receiving their expected funds, with these cases being subject to ongoing appeals and litigation.

The Challenges of Data Management

McWilliams also addressed the challenges of data management. Due to the “significant costs and complexities of maintaining and interpreting Synapse’s data and systems and the lack of estate resources,” estate reconciliation activities have been discontinued. Despite this, the Trustee has taken steps to preserve critical data by providing copies of the MongoDB ledger and select AWS data subsets (historical trial balance data and reconciliation files) to the partner banks. The report notes that “no party has come forward to assume legal custody and the costs of preserving additional Synapse data beyond the final disposition of this case.” According to the report, the lack of a custodian for the remaining data raises concerns about its long-term availability for potential future inquiries or legal proceedings.

Efforts to monetize Synapse’s assets have also reached an impasse. McWilliams said she “analyzed several inquiries and deal proposals.” However, the report concludes that “no feasible deals could be reached that would allow meaningful value to be returned to the estate” due to the estate’s limited resources and substantial debt. Consequently, negotiations have ended, and “no actionable opportunities for a sale of the debtor’s assets” remain.

McWilliams also provided a line of sight into her thinking about the next steps. She reported that her intention to seek dismissal or conversion to Chapter 7 signifies a recognition that the goals of Chapter 11 are no longer achievable in this case. Dismissal would generally return the company to its pre-bankruptcy state, although with its significant financial difficulties likely unresolved. Conversion to Chapter 7 would involve the appointment of a new trustee tasked with liquidating any remaining assets to pay creditors, following a different set of priorities and procedures. The choice between these options will likely be determined by the court but no hearing date has been set.