Attorneys for Sprout in one suit withdraw, allege nonpayment

Lawyers for failed lender Sprout Mortgage have withdrawn from the firm's employee wage lawsuit, claiming they haven't been paid in over six months.

A federal court Tuesday allowed three attorneys of The Jackson Lewis Law Firm to stop representing Sprout, its former executives and its parent company. Those defendants and a class of over 100 ex-Sprout workers agreed last year to a $3.5 million settlement over alleged lost wages at the time of the company's abrupt shutdown in July 2022.

Sprout's legal team hadn't been paid since well before last July and has struggled to get timely responses from defendants, attorney Marc Wenger wrote in a Jan. 5 filing in the U.S. District Court for the Eastern District of New York. It's unclear how much the lender's counsel was owed.

"We have no basis to expect payment of the considerable outstanding balance, let alone any amounts incurred going forward," Wenger's filing read. "Our ability to effectively represent our clients has been further compromised by the deterioration in communications with our clients since the commencement of the bankruptcy."

A trustee for Sprout in its bankruptcy case successfully petitioned last month to halt the multimillion dollar payout to employees as the separate Chapter 11 proceedings get underway. The non-qualified mortgage lender owes $66 million in secured and unsecured claims to creditors, according to case filings. 

A judge in the workers' complaint ordered an update from the parties by Feb. 9. While three of the former executives are close to obtaining counsel, ex-CEO Michael Strauss' search is unclear, Wenger wrote. 

Attorneys for each side hadn't responded to requests for comment at deadline.

One of those former executives, Shea Pallante, is also facing a $33,000 fine from the bankruptcy court over his delay to submit a deposition, according to court documents. The ex-Sprout president, who allegedly laid off hundreds of his employees via video call, was fined $500 per day from Oct. 30 to Jan. 4 until he appeared for an oral deposition. 

Pallante, who has been Arc Home's chief production officer since last March, claims in a Jan. 10 filing he did not receive court notices over the past six months. Court correspondences were sent to Arc Home's corporate headquarters in New Jersey and a purported home address for Pallante, who said he moved to a different residence in Tennessee during that time.

Once messages regarding the court directives reached him Dec. 5 through Arc Home, Pallante responded by retaining counsel, submitting requested documents and scheduling a deposition as soon as possible, after the new year.

"I never would have acted in any matter which would place me in a calumnious light with this court," Pallante wrote in an affidavit.

Counsel for Pallante is seeking relief from the $33,000 fine over his inadvertent delay in complying. An attorney for the executive didn't immediately respond to a request for comment Thursday morning.

Elizabeth Strauss, the former CEO's wife, was also found in contempt last year before she eventually handed over documents and appeared for a deposition, court records show. The Strausses were behind a short-lived origination shop last year based in Florida, Smart Rate Mortgage. The company originated what HousingWire reported was over $5 million in loan volume before a state regulator pulled Michael Strauss' origination license.

Neither Michael nor Elizabeth Strauss could be reached for comment.

In other news, staff members of one of the other mortgage companies that went out of business in the latest origination cycle have gained some relief.

A federal judge late last month granted final approval for a $1.75 million settlement to a class of laid-off employees of another non-QM lender, First Guaranty Mortgage Corp. The employees had alleged that the company had failed to adhere to the Worker Adjustment and Retraining Notification Act.