On June 20, the Consumer Financial Protection Bureau (CFPB or Bureau) filed a statement of interest in support of converting the bankruptcy case of Synapse Financial Technologies, Inc. from Chapter 11 to Chapter 7, rather than dismissing it. This move comes amidst concerns over significant consumer harm stemming from Synapse’s alleged unfair practices in managing funds across its network of partner financial institutions. The shortfall between the money consumers had in their accounts at the time their accounts were frozen and the money that has been returned by the partner financial institutions may be as high as $95 million.
Background
Synapse Financial Technologies, a fintech company, partnered with various depository institutions to provide financial services to consumers. However, following its bankruptcy filing, numerous consumer accounts were frozen, leaving many with only partial recovery of their funds. The CFPB has received hundreds of complaints from affected consumers, highlighting potential unfair practices by Synapse in tracking and reconciling funds across partner institutions.
CFPB’s Position
The CFPB’s statement, filed in the United States Bankruptcy Court for the Central District of California, advocates for converting the case to Chapter 7. This conversion is seen as more beneficial for consumers who have suffered financial harm due to Synapse’s alleged violations of the Consumer Financial Protection Act (CFPA). The CFPA authorizes the Bureau to obtain monetary relief for acts or practices that violate the CFPA, and the Bureau may have an unsecured claim against Synapse for monetary and other relief to address consumer harm. The CFPB believes that Chapter 7 conversion will facilitate a more efficient resolution and potential compensation for victims, leveraging the Bureau’s Civil Penalty Fund.
Next Steps
Section 1112 of the Bankruptcy Code provides that a case may be converted to Chapter 7 or dismissed “for cause.” This involves a two-step analysis: determining whether “cause” exists and deciding which option is in the best interest of creditors and the estate. The court has wide discretion in making this determination.
If converted, the CFPB plans to continue its investigation into Synapse’s practices and pursue claims to address consumer harm. Dismissing the case would require the Bureau to file a complaint and litigate its claims against Synapse in federal district court, a process that may take significantly longer and delay relief to harmed consumers.
Our Take
The CFPB’s decision to support converting Synapse’ bankruptcy case from Chapter 11 to Chapter 7 aligns with its strategic priorities for 2025 (discussed here), which emphasize reducing regulatory burdens while ensuring consumer protection, particularly in cases involving actual fraud and identifiable victims. By advocating for Chapter 7 conversion, the CFPB aims to leverage its Civil Penalty Fund to provide direct relief to affected consumers, addressing the significant financial harm caused by Synapse’s alleged unfair practices.
This approach is consistent with the CFPB’s recent notice in the Federal Register on June 18, proposing changes to the Civil Penalty Fund’s allocation procedures. The proposed rule suggests removing references to using the Fund for consumer education and financial literacy programs, thereby focusing more on compensating victims directly.
