Sprout Mortgage reportedly in settlement talks with laid off employees

Sprout Mortgage is addressing some of the fallout from its shutdown last summer, discussing settlements with former employees and certain business partners but not cooperating with other lenders. 

The former East Meadow, New York-based business faces five federal suits from workers and mortgage firms over its alleged failure to make payments in the months leading to its July closure. In one of them, the company is working on a settlement with former staff who sued for three weeks of owed back pay, a compromise that would represent a rare concession for mortgage professionals impacted by mass layoffs last year. 

Ninety-six former Sprout employees have joined the lawsuit in the U.S. District Court for the Eastern District of New York, according to court records. The complaint accuses CEO Michael Strauss of instructing personnel not to issue paychecks for a two-to-three-week period last June and July.

"Without revealing confidential information, I can report that the attorneys had a substantive discussion over the documents that defendants have produced concerning Defendant Strauss's ability to contribute to a settlement," wrote attorney Scott Simpson of Menken Simpson & Rozger, on behalf of plaintiffs, in a filing Tuesday.

Counsel also discussed Strauss' claim of insolvency but didn't disclose further details, and didn't describe any proposed settlement amounts. Simpson suggested an update would be filed next week. Strauss and attorneys for the parties didn't respond to inquiries this week.  

Sprout is approaching settlements in two other business disputes, according to federal court records. The firm consented to a $475,000 judgment against it from New Jersey-based non-QM firm Family First Funding, in a dispute over Sprout's alleged default on a $5.1 million loan purchase. 

Another non-QM lender, California-based New Wave Lending Group, is suing Sprout in a New York federal court for $6 million, seeking recourse for the company's alleged failure to purchase $32 million of loans. The sides have reached consensus on one portion of New Wave's claims, according to a filing earlier this month.

Sprout meanwhile filed a counterclaim Tuesday in a lawsuit in New York federal court from Merchants Bank of Indiana, which accuses Sprout of failing to remit a $1.2 million loan payoff to the bank. Counsel for MBIN last week asked a judge to deny Sprout's counterclaim because of its late responses to court deadlines.

"Merchants has serious concerns about collectability, including what Sprout has done with the payoff for the Ganz Loan," wrote attorney John Waller of Dinsmore & Shohl on behalf of MBIN, referring to the financing at the center of the lawsuit.

An attorney for Sprout Tuesday filed a counterclaim, denying MBIN's breach of contract accusation and accusing the bank of never remitting $810,000 owed to Sprout for a loan trade commitment from a mortgage originated in May. 

Sprout is also allegedly not cooperating in a suit from warehouse lender FirstFunding, which is seeking $262,500 in dues unpaid following an August agreement. FirstFunding, a subsidiary of First American Financial Corp., provided Sprout a warehouse funding facility that was $175 million at the time of Sprout's shutdown.

An attorney for FirstFunding in December wrote to the court that Sprout stopped cooperating in September. A federal judge earlier this month ordered counsel for FirstFunding to show cause by Jan. 31 to continue the case, citing a lack of prosecution efforts. 

Attorneys in all of the cases didn't respond to requests for comment this week.

Strauss in August quietly registered a new company, Smart Rate Mortgage, in Jacksonville, Florida, according to the Nationwide Multistate Licensing System. Smart Rate was granted a license to originate loans in Illinois in November, and Strauss is listed as a principal loan originator. The registration was first reported by HousingWire.

Smart Rate's website includes loan application forms but does not include other details. The company's phone number returned a dead dial tone this week and a message to the firm's email address was unreturned.

The embattled Strauss in 2009 agreed to pay a $2.45 million settlement with the Securities and Exchange Commission over his alleged role in the demise of American Home Mortgage. The SEC charged him with engaging in accounting fraud and misleading investors in his CEO role in the lead up to the lender's collapse at the onset of the Great Financial Crisis. Strauss neither admitted nor denied the allegations in agreeing to the settlement, and was barred from serving as an officer or director of a public company for five years.