Sprout Mortgage, ex-workers reach $3.5 million settlement

Former employees of shuttered lender Sprout Mortgage are poised to receive some of their lost wages stemming from the company's abrupt shutdown last July.

Ex-workers in four lawsuits in California and New York have reached a $3.5 million settlement agreement with Sprout, its parent company and its former executives, according to court records. A judge has yet to approve the motion for a settlement, which was filed last week in the U.S. District Court for the Eastern District of New York. 

"After months of hard-fought negotiations, the filing of this motion is a key step towards finally getting hundreds of former Sprout employees compensation for the various wage-related claims alleged in the four class action cases we are seeking to consolidate in the Eastern District of New York," wrote attorney Scott Simpson of New York-based Menken Simpson & Rozger LLP, on behalf of plaintiffs in an email Monday. 

Approximately 800 employees are eligible to receive compensation if the settlement is approved, Simpson said, although counsel could not determine when a judge would render a decision. 

Attorneys for Sprout declined to comment Tuesday and a phone number for former Sprout CEO Michael Strauss was disconnected. The settlement is not an admission of wrongdoing by Sprout or any of the named defendants, according to the motion.

The former non-QM lender let 578 employees go in a sudden closure as headwinds in the housing market began to emerge. Laid-off personnel, along with creditors, filed a spate of lawsuits against the East Meadow, New York-based Sprout and its parent company, Recovco Mortgage Management.

Sprout, according to a lengthy filing, would have deposited $1.95 million into the settlement fund by Monday and an additional $300,000 before June 15. Another $1.25 million is slated to come 14 days within the closing of the sale of Strauss' New York apartment. The home was listed on Zillow for $22.5 million as of Monday afternoon and was put up for sale last August, Inside Mortgage Finance reported.

The "shutdown class" of at least 120 plaintiffs in a New York federal case are poised to receive $1.78 million, with each employee receiving approximately 42% of their unpaid wages, the motion said. Two separate classes of California plaintiffs will collectively receive $306,000, and $13,980, respectively. Attorneys are also set to receive $1.6 million, or a third of the agreed amount, while other funds are earmarked for costs such as distributing notifications.

"The named plaintiffs and class counsel believe that the settlement provides a just, fair, reasonable, and favorable recovery for the settlement class and settlement collective," the motion, signed by attorneys for all parties, states. 

The lawsuits argued Sprout should have filed a Worker Adjustment and Retraining Notification months before its July closure, because the lender had already missed payments to multiple vendors for several months. Plaintiffs also accused Sprout of failing to pay millions of dollars in payroll taxes, and claimed Strauss was working on a payment plan with the Internal Revenue Service prior to the closure. 

The company also allegedly continued to deduct healthcare premiums from employees' paychecks in the prior two months but failed to forward the money to an insurance provider, saddling workers with healthcare bills after the shutdown. 

Plaintiffs last October suggested a settlement amount of $20 million from combined unpaid wages, WARN and COBRA violations. Sprout and named defendants allegedly said they wouldn't have the financial ability to pay an eight-figure judgment and the collection risk against Strauss was high. 

Attorneys for plaintiffs looked into Strauss' assets including vehicles, real estate and potential holdings related to his family's involvement in equestrian sports, the motion said. 

"From this investigation, we learned many potentially valuable assets were in fact encumbered or no longer in Defendant Strauss' possession. This information helped MSR attorneys to offer principled advice to their clients regarding settlement decision-making," the motion said, referring to the initials of a law firm.

Strauss recently attempted to start a new mortgage lending business and is appealing a suspension of his origination license in Illinois. Former Sprout president Shea Pallante, who allegedly conducted the video call in which employees were informed of their termination, was hired by non-QM lender Arc Home in March as chief production officer. 

Sprout, which never declared bankruptcy, reached a $475,000 settlement last month with Family First Funding over a loan purchase dispute. Lawsuits from three additional creditors remain pending in federal courts.