1 DOUGLAS P. WILSON, RECEIVER DOUGLAS WILSON COMPANIES 2 1620 Fifth Avenue, Suite 400 San Diego, California 92101 3 Telephone: (619) 641-1141 Facsimile: (619) 641-1150 4 Email: [email protected] 5 6 7 8 SUPERIOR COURT OF THE STATE OF CALIFORNIA 9 FOR THE COUNTY OF ORANGE 10 11 UMB BANK, N.A., a national banking Case No. 30-2021-01201461-CU-BC-CJC association, as successor by merger to 12 MARQUETTE TRANSPORTATION RECEIVER’S INITIAL INVENTORY FINANCE, LLC AND REPORT 13 Plaintiffs, 14 Hon. Martha K. Gooding v. Department C32 15 SYNRGO, INC. f/k/a DOCUMENT 16 PROCESSING SOLUTIONS, INC., a California corporation; and Does 1 through 17 50, inclusive, 18 Defendants. 19 20 21 22 23 24 25 26 27 28 RECEIVER’S INITIAL INVENTORY AND REPORT 1 Douglas P. Wilson (the “Receiver”) hereby submits this Receiver’s Initial Inventory and 2 Report (the “Report”) in accordance with the Order Appointing Receiver (the “Order of 3 Appointment”) dated June 9, 2021 and entered in the above-entitled matter. This Report is 4 organized into the following five sections: I. Appointment Information, II. Background and 5 Description of the Business, III. Inventory, IV. Initial Report and General Status Update, and V. 6 Accounting and Fees. 7 I. APPOINTMENT INFORMATION 8 1. Appointment of the Receiver 9 On June 9, 2021, the Superior Court of California, County of Orange ordered the 10 appointment of Douglas P. Wilson as Receiver to manage, oversee and, if he deems necessary and 11 appropriate, take steps to properly wind down Synrgo, Inc.’s (“Synrgo”) business. This includes 12 taking possession and control of all assets owned by Synrgo and used in connection with its business, 13 including, but without limitation, Synrgo’s accounts receivable, inventory, bank accounts, real 14 property, equipment, and proceeds therefore (collectively, the “Receivership Property”) as further 15 described in the below inventory. 16 2. Receiver’s Oath and Bond 17 In accordance with the Order of Appointment, the Receiver signed his oath and obtained a 18 bond in the amount of $25,000.00; the originals of which were filed with the Court on June 9 and 19 June 10, 2021, respectively. Conformed copies of the Oath and Bond are attached hereto as Exhibit 20 “A”. 21 3. Recent History and Leadup to the Receiver’s Appointment 22 The preamble to the Receiver’s appointment follows a serpentine path and, for the sake of 23 clarity, the following will provide a brief history of legal events that have led up to the Receiver’s 24 appointment. On May 14, 2021, Plaintiff UMB Bank, N.A. (“UMB”) filed a complaint against 25 Synrgo for breach of contract, intentional misrepresentation, conversion, money had and received, 26 and injunctive relief. On May 18, 2021, Synrgo voluntarily filed a Chapter 11 bankruptcy petition 27 in the Central District of California. Force 10 Partners was retained as the Chief Restructuring 28 Officer (the “CRO”) of Synrgo on or about May 21, 2021. After it was quickly determined that 1 RECEIVER’S INITIAL INVENTORY AND REPORT 1 bankruptcy was not a viable path for the issues facing the company, on May 24, 2021, Synrgo filed 2 an emergency motion to dismiss the bankruptcy for cause. With no viable business, all employees 3 were terminated by Karl Klessig, the CEO and owner of Synrgo, via email on May 24, 2021. The 4 Bankruptcy Court granted Synrgo’s dismissal motion on May 27, 2021. Synrgo issued a board 5 resolution engaging Douglas Wilson Companies as of May 27, 2021, to take possession and control 6 of the assets and business during the intervening period between the bankruptcy dismissal and the 7 anticipated State Court appointment of a receiver (the “GAP Period”). Attached as Exhibit “B” 8 is a copy of the board resolution. The Receiver and the CRO coordinated efforts to assist in an 9 orderly transition and winddown of Synrgo. The following day, on May 28, 2021, UMB filed an 10 ex parte application for the appointment of a receiver over Synrgo. Following additional hearings 11 and briefing, the Receiver was formally appointed by this Court on June 9, 2021. 12 II. BACKGROUND AND DESCRIPTION OF SYNRGO’S BUSINESS 13 4. Description of the Business 14 Synrgo’s business revolved entirely around real estate closings. Synrgo performed 15 document recording services – including the advanced payment of related property taxes, transfer 16 taxes and fees – on behalf of title companies and escrow agents (“Customers”). Due to the 17 complexity of the disparate recording schemes implemented by numerous counties, Synrgo offered 18 a one-stop shop for some of the largest and well-known title companies. Shortly after Synrgo’s 19 completion of its services, Customers would receive an invoice from Synrgo for reimbursement of 20 the advanced payments made to the counties plus Synrgo’s service fee. 21 Synrgo was a significant player in the industry in California, although it also offered 22 recording services in counties around the nation. To provide context of magnitude, Synrgo 23 performed approximately 1,690,000 separate recordings in 2019, 2,261,000 in 2020, and 941,000 24 for the period of January through May 2021, when Synrgo collapsed. Anecdotally, the Receiver 25 has been told Synrgo performed as many as one-quarter of the total recordings in California during 26 the last two years. Further demonstrating the high volume at which Synrgo operated, it advanced 27 between $2 to $3 million each and every day on behalf of its Customers for fees and taxes related 28 to real estate recordings. As a result, in 2017 Synrgo entered into a factoring agreement (the 2 RECEIVER’S INITIAL INVENTORY AND REPORT 1 “Factoring Agreement”) with Marquette Transportation Finance, LLC (“Marquette”), a company 2 that was subsequently acquired along with the Factoring Agreement by UMB. This Factoring 3 Agreement allowed Synrgo to obtain financing from Marquette, and then UMB, based upon the 4 assignment of its accounts receivable (“A/R”). UMB would provide Synrgo with cash, a loan, equal 5 to a percentage of the gross amount of collateral A/R. The loan would then be repaid to UMB 6 through the collection of A/R. Typically, A/R would be repaid quickly by Customers as the 7 associated real estate closing would occur soon after the recording was performed. 8 Amounts being advanced by Synrgo on behalf of its Customers were immense totaling $844 9 million in 2019 and $815 million in 2020. Although Synrgo advanced these large sums of money, 10 Synrgo generated only approximately $25.6 million gross revenue in 2019 and $27.4 million in 2020 11 from the various fees it charged to Customers. 12 5. Synrgo’s Downfall 13 During the period 2019 through 2021, Synrgo had been aggressively expanding its business 14 operations. This expansion included a $2 million increase in payroll from 2019 to 2020 and the 15 opening of new local offices around the country. Undeterred by the pandemic, Synrgo was in the 16 final stages of opening a new 11,000 square foot office in Coraopolis, Pennsylvania to serve as its 17 East Coast headquarters right before its collapse. 18 In approximately April 2021, however, UMB discovered a large amount of A/R had been 19 directly collected into Synrgo-controlled bank accounts as opposed to being deposited into the 20 lockbox overseen by UMB. This was a significant event of default under the Factoring Agreement 21 and appears to have also been an effort by Synrgo to continue to utilize A/R that had already been 22 collected as collateral for factored loans from UMB. At this time, Synrgo had also reached the 23 maximum credit amount under the Factoring Agreement. Without a source for additional funding, 24 the company experienced a paralyzing cash crunch. In late April 2021, Synrgo payments to the 25 county recorders’ offices began to bounce due to insufficient funds. By early-May 2021, nearly all 26 payments were bouncing. On May 14, 2021, Mr. Klessig, the CEO and owner of Synrgo, emailed 27 all Synrgo employees that due to financial difficulties, the company would cease providing services 28 to its customers. A copy of this email is attached as Exhibit “C”. On May 24, 2021, an email was 3 RECEIVER’S INITIAL INVENTORY AND REPORT 1 sent by Mr. Klessig terminating approximately 340 employees and leaving only a core group of 2 roughly fifteen. A copy of this email is attached as Exhibit “D”. 3 By the time of the Receiver’s appointment on June 9, 2021, it was clear Synrgo’s collapse 4 was complete and there was no viable path to restart operations. Instead, an orderly liquidation 5 aimed at maximizing a recovery for creditors was the sole option. 6 III. INVENTORY 7 6. Introduction 8 Synrgo’s assets can broadly be separated into five categories: 1) Cash, 2) Real Property, 3) 9 Accounts Receivable, 4) Personal Property, and potentially 5) Intellectual Property. This section 10 will focus on providing a description of each of the asset categories belonging to Synrgo, however, 11 details to the Receiver’s planned sales process and strategy to maximize value are further outlined 12 in Section 18 of this Report. 13 7. Initial Cash and Checks Turned Over 14 By the time the Receiver was appointed, most of the cash held in Synrgo’s various bank 15 accounts had been consolidated and expended. However, approximately $276,055.76 in checks was 16 turned over to the Receiver from various sources. These sources included $154,176.75 of cash from 17 accounts held at Bank of America, $80,773.91 of A/R checks, and $41,075.10 representing the 18 turnover of the remaining retainer held by Synrgo’s former bankruptcy counsel, Sean O’Keefe.