Jelena McWilliams, former president of the Federal Deposit Insurance Corporation (FDIC), appointed as Chapter 11 trustee in Synapse bankruptcy.

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At least 200,000 individual fintech customers have lost access to their money due to the collapse of Synapse Financial Technologies – a situation that a lawyer for an affected fintech called “a house on fire” in bankruptcy court today. During that hearing, U.S. Bankruptcy Court Judge Martin R. Barash of the Central District of California agreed to appoint an independent Chapter 11 trustee to oversee Synapse, removing existing management from control.

After the hearing, Barash approved the appointment of the former FDIC chairman as a trustee Jelena McWilliams, currently head of the Financial Institutions Group and managing partner of the Washington, D.C. office of law firm Cravath, Swaine & Moore. Before joining the FDIC in 2018, she served as executive vice president and chief legal officer at Fifth Third Bank
Fifth Third Bank
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Barash said his priority is ensuring consumers have access to their money, but he made no predictions about how soon that might happen. He had previously tried, unsuccessfully, to involve federal banking regulators in resolving the mess. “I don’t think there’s anything more important now than providing funds to end users. Period,” Barash said today, adding that he felt terrible “when you hear people come and tell us they can’t buy food, they they are unable to pay the first mortgage installment.”

“This is a house on fire,” said Michael Gottfried, an attorney representing Yotta Technologies, one of the fintechs whose clients have lost access to their funds.

According to San Francisco-based Synapse, which acts as an intermediary between traditional banks and fintechs that want to offer banking and related services, it had 100 fintech customers with around 10 million end customers at the beginning of the year. It’s unclear how many of these fintechs were still doing business with Synapse when Synapse filed for Chapter 11 bankruptcy in late April, which theoretically allows management of a troubled company to continue running it, both to rehabilitate the business is to be liquidated in the future. an orderly fashion. Synapse’s original Chapter 11 plan was to sell it operational activities at the TabaPay payment processorthat it would hire many of its approximately 100 employees and serve its customers.

The deal fell through, and on May 11, one of Synapse’s banking partners, Arkansas-based Evolve Bank & Trust, cut off individual consumers’ access to their accounts and debit cards, saying it couldn’t access records they Synapse needed to determine the amount in each individual’s account. In a bankruptcy court filing last night, Evolve estimated the number of affected fintech customers at 200,000. Synapse says access to its records has been restored, but Evolve and Synapse’s other banking partners now say they cannot rely on Synapse’s numbers.

Additionally, banks blocked Synapse’s access to the few funds it had left to pay its employees. Yesterday, Synapse CEO and founder Sankaet Pathak said in a written statement to the court that he had already fired all but 18 employees and six contractors, and that he was expected to fire the rest today.

At today’s hearing, Barash made clear that the Chapter 11 trustee appointment is designed to keep Synapse’s computers running long enough to give customers their money back in an orderly manner, not to ever revive Synapse’s business.

Ahead of today’s hearing, Synapse and the banks made starkly conflicting claims. For example, Synapse says Evolve owes fintech customers $150 million, but Evolve says it holds much less.

One controversy that arose during the hearing illustrated the danger of small banks acting as fintech partners. An attorney for fintech client Yieldstreet complained that Synapse partner Lineage Bank was unresponsive to his efforts “to return money to customers.” But Lineage Bank attorney Chris Glenos, a partner at Bradley, Arant, Boult Cummings in Birmingham, Ala., said Franklin, Tenn.-based Lineage was doing its best with just 45 employees and three physical branches. “We are deploying extraordinary resources, more resources than the bank has, to try to address this problem,” Glenos said.

Glenos also made what appeared to be a veiled attempt against Synapse’s venture capital backers. “The documents provided to us by the debtor are clearly incorrect and cannot be verified,” she said. “We look out for the interest of all end users and will not be bullied by wealthier fintechs who may have common ownership with the debtor, causing them to favor the interests of their end users over others.” (Synapse raised $51 million from venture capital investors.)

The US trustee had originally requested that Synapse be converted into a Chapter 7 liquidation, an option that Synapse itself approved yesterday. But he changed his mind. “We think that, at least in the short term, there are more options available to a trustee if this case remains in Chapter 11,” said Russell Clementson, an attorney with the U.S. Trustee’s Office. “If the trustee can explore options, contact the parties who have been unable to resolve their differences, see if progress can be made in getting the money to the end users.” He also noted that the independent trustee who was selected to manage Synapse would not be eligible under Chapter 7 rules because he is not located in the same bankruptcy district.

Synapse has shored up its skeletal operations over the past week with money donated by affected fintechs in a desperate bid to fix the problem. Clementson suggested that those same donors might be willing to continue funding operations with a Chapter 11 trustee at the helm. Otherwise, he noted that it would not be unusual for a Chapter 11 trustee to promptly convert the case to a liquidation. “We just don’t see any harm in allowing an independent trustee to take a look, talk to people and see if there’s anything that can be saved here,” Clementson added.

In a statement yesterday, Synapse agreed that a Chapter 7 was necessary, but today raised no objection to the appointment of a Chapter 11 trustee.

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