Sprout settlement rejected by judge who finds executive in contempt

A federal bankruptcy judge has rescinded $1.95 million slated for Sprout Mortgage employees who were laid off abruptly last summer, the latest twist in the lender's dramatic shutdown. 

Over 100 former workers were due to receive a $3.5 million settlement in a class action lawsuit. A trustee for the non-qualified mortgage lender in a separate bankruptcy case asked the court to halt that payout as the Chapter 11 proceeding gets underway. Creditors initiated the bankruptcy case in July after Sprout failed to settle their individual claims for months on end. 

U.S. Bankruptcy Judge Robert Grossman on Dec. 1 ordered the larger portion of the settlement funds, held in escrow by Settlement Services, Inc., not to be distributed until his further order. Attorneys for the class of ex-employees, anticipating that move, have argued in their lawsuit to target Sprout's former executives, rather than the company itself, to circumvent the payout hurdle. 

Grossman two weeks ago also ordered former Sprout president Shea Pallante be held in contempt for his failure to comply with bankruptcy court orders to produce documents and submit a deposition. The Pallante order follows the trustee's attempts to reach him since August. 

Pallante was the Sprout executive who allegedly told hundreds of employees last July in a video call they would be terminated immediately. In March, non-QM lender Arc Home named Pallante its chief production officer. 

Court records show an attorney for the bankruptcy trustee served Pallante the contempt order via mail to both Arc Home's headquarters and a Tennessee residence. Judge Grossman is also assessing for Pallante a $500 daily fine from Oct. 30, a sum which would equate to over $21,000 as of December 11. 

Pallante didn't respond to messages seeking comment Monday. 

If Pallante continues to ignore court orders, the judge wrote he could direct the executive to be arrested and detained in his home jurisdiction. The trustee's attorney didn't respond to a request for comment Monday regarding the likelihood Pallante could be detained.

The trustee also previously sought to hold the wife of former CEO Michael Strauss, Elizabeth Strauss, in contempt but she eventually complied in handing over documents and appearing for her oral deposition, according to a November filing. 

Sprout Mortgage faces numerous legal challenges from counterparties and owes $66 million in secured and unsecured claims to mortgage players. The lender never filed for bankruptcy itself and Michael Strauss allegedly transferred $24.4 million from the business to himself, case documents said.

Following Sprout's demise, Michael Strauss originated over $5 million in home loan volume through a short-lived company, Smart Rate Mortgage. An Illinois regulator revoked his origination license earlier this year.