Hey all, Jason here.
Dropping into your inbox with an emergency Thursday update, following this morning’s court hearing in the Synapse bankruptcy case — promise to keep it brief!
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!The deal for TabaPay to acquire Synapse’s assets hinged on at least three key preconditions:
Synapse filing for Chapter 11 bankruptcy, such that TabaPay could acquire Synapse’s assets free and clear, without exposure to potential liability
Evolve Bank & Trust agreeing to fully fund “FBOs,” or accounts holding pooled end-user funds
The court approving a settlement between Synapse and Evolve, which arose from disagreements about who was responsible for possible shortfalls in FBO accounts, among other issues
Synapse’s lawyer explained that it hadn’t made sense to file the bankruptcy, until the details of the TabaPay offer and the resolution to the Evolve FBO issue had been worked out.
But now, the potential agreements that would fulfill those three requirements collapsed in spectacular fashion. What happened in court today:
Today, Synapse’s lawyer indicated Evolve has previously said it needed more time to fund the FBO account
And that, now, Evolve claims it has funded the account, even though, to Synapse’s knowledge, no additional funds have been added since the signing of the Synapse/Evolve settlement agreement
Had that been Evolve’s position at the time the settlement agreement was signed, Synapse never would have agreed to it nor filed the bankruptcy proceeding, Synapse’s lawyer said
Synapse does not agree with Evolve and cannot represent to the court nor TabaPay that it agrees with Evolve’s position, its lawyer said
Synapse isn’t sure who is harmed by the FBO account not being funded, but it is probably Evolve’s end users, not Synapse’s end users, its lawyer said
TabaPay sent an email to Synapse yesterday, May 8th, that TabaPay is electing not to proceed with the sale closing
Evolve’s lawyer reiterated that Evolve’s position is that accounts at Evolve related to Synapse are fully funded and there “are no end user issues whatsoever”
Secured creditors TriplePoint and Silicon Valley Bank (part of First Citizens now) will immediately issue Synapse a notice of default under the cash collateral order and, after a required five day notice period, terminate Synapse’s access to cash collateral
Lineage’s lawyer raised the issue to the court that there are approximately $60 million to $80 million of Synapse end-user funds held at Lineage in an FBO in Synapse’s name, that, absent Synapse’s cooperation or access to information that it controls, Lineage cannot return to users
An immediate shut down of the company and a conversion to a Chapter 7 bankruptcy liquidation seem to be the most likely outcome
Following Lineage’s attorney raising the potential challenges arising from the collapse of the pending TabaPay acquisition, Judge Martin Barash, who is overseeing the bankruptcy case, commented that the fallout of the acquisition not being approved would be a “hot mess.”
Apart from the court proceedings, Lineage ceased processing ACH and wire transactions for Synapse and Synapse’s clients as of today, with multiple Synapse clients confirming to Fintech Business Weekly that they and their end users are experiencing disruptions to payment processing.
In a statement Synapse cofounder and CEO Sankaet Pathak released later on Thursday, he accused one-time client Mercury of moving nearly $50 million in FBO funds — end-user money — that didn’t belong to it.
According to Pathak’s statement, which included screenshots he describes as Evolve’s analysis of the situation, during Mercury’s transition off of Synapse into a direct relationship with Evolve, which occurred during the period from September 28th to October 10th, Mercury moved $31,920,151.62 more than it should have into a new general ledger at Evolve.
The amount of customer funds Pathak claims is missing, $31,920,151.62, is extremely close to the amount Mercury argues Synapse owes it in a contract dispute about deposit rebate payments — $31,514,080.73.
By September 9th, Mercury stated that it no longer used any services provided by Synapse and that all of its customer funds were accounted for and reconciled appropriately.
But Pathak’s statement alleges that, even after the transition period, Mercury continued to utilize Synapse-related program accounts at Evolve, resulting in an additional $17,703,677.85 being withdrawn from the account that should not have been.
Pathak says Synapse notified Mercury of the issue on March 6th and, despite Synapse’s good-faith efforts to find a path to a resolution, Mercury “seemed more confrontational than cooperative” — and filed an appeal to the court’s denial of Mercury’s request for a temporary protective order (TPO) freezing Synapse’s assets.
In total, Pathak alleges Mercury moved a total of just shy of $50 million that didn’t belong to it.
For its part, Evolve, per its attorney’s statement at today’s bankruptcy hearing, believes all Synapse-related FBOs at Evolve are fully funded.
A follow up court hearing has been scheduled for Monday, May 13th, at 2:30pm PT, primarily to focus on questions surrounding the cash collateral.
With the collapse of the TabaPay deal, the Synapse bankruptcy estate having its access to funding likely cut off in five days, and Lineage terminating ACH and wire processing for Synapse and its clients today, there really are no good paths forward at this point.
The number one concern, bankruptcy proceedings notwithstanding, should be ensuring end-users aren’t at risk of losing deposits and, if possible, do not experience interruptions in access to funds or their accounts.
After the time of publication, a Mercury spokesperson shared a statement which reads in part: “Mercury takes any claims regarding our customers’ funds extremely seriously. We have thoroughly investigated Synapse’s claims from the moment they were brought to our attention in March 2024 — six months after we migrated off of Synapse — and are confident that they have no merit and all customer funds are accounted for.”
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