Sprout Mortgage sued for breaking post-closure agreement

A warehouse lender is suing Sprout Mortgage to recover a six-figure sum, claiming the shuttered company and its CEO are failing to uphold an agreement the firms reached after Sprout's July closing.

FirstFunding, the warehouse lending subsidiary of First American Financial Corp., sued Sprout for breach of contract last week in the U.S. District Court for the Central District of California. The company is seeking $262,500 held in a Banc of California account; the depository services loans in Sprout's closed loan portfolio, according to the suit. Banc of California is not a named party in the complaint. 

Sprout secured a $50 million warehouse funding facility from FirstFunding in October 2020, according to the complaint, which includes copies of the agreements. The amount was increased to $230 million in April and reduced to $175 million in May. On July 6, the day Sprout laid off hundreds of workers, Sprout CEO Michael Strauss allegedly told FirstFunding his company was going under. 

The sides then reached a deal Aug. 5, which stated FirstFunding would receive mortgage loan proceeds directly from the lender or any borrower or purchaser of the loans, according to a copy of the agreement. The outstanding principal due to FirstFunding as of July 6 is at least $220,281,891.55.

Sprout has since failed and refused to pay FirstFunding its dues under the agreement, counsel for FirstFunding wrote.

"Sprout and Strauss are no longer working cooperatively with FirstFunding to effectuate the prompt disposition of the Pledged Mortgage Loans and reduction of advances under the Funding Agreement to maximize value," wrote attorney Benjamin West of Dallas-based Frost Brown Todd LLC, on behalf of FirstFunding. 

FirstFunding is seeking the $262,500 in a Banc of California account Sprout was supposed to transfer to satisfy their agreement along with temporary, preliminary and permanent injunctive relief to prevent Sprout and its employees from misappropriating other monies due.

Counsel for FirstFunding and representatives for Sprout, FirstFunding and Banc of California didn't return requests for comment Monday afternoon. 

An attorney for Sprout meanwhile responded to two other lawsuits Tuesday, denying all accusations of wrongdoing but admitting for the first time the lender had shut down. 

Toms River, New Jersey-based non-QM lender Family First Funding, unrelated to FirstFunding, sued Sprout in May for breach of contract for defaulting on a purchase of $5.1 million in loans. New Wave Lending Group, another Industry, California-based non-QM lender, filed a complaint against Sprout in July for approximately $6 million, seeking recourse for Sprout's failure to purchase $32 million worth of loans. 

In separate filings Tuesday, attorney Nathan Jones of Uniondale, New York-based Forchelli Deegan Terrana LLP responded to the complaints, requesting the federal judges overseeing the cases deny all claims against Sprout. Both responses represent Sprout's first public admission that it shuttered July 6.

Jones didn't respond to requests for comment Tuesday morning.

Sprout hasn't responded to two additional complaints, including one from Merchants Bank of Indiana, which accused the lender in July of failing to remit a $1.2 million loan payoff to the bank. Former Sprout employees are also suing the lender's parent company Recovco Mortgage Management over its abrupt closure, alleging Strauss denied workers their final three weeks of pay. The East Meadow, New York-based Recovco hasn't made any public disclosures since the closure and its website has shut down.

Sprout and non-qualified mortgage competitor First Guaranty Mortgage Corp. are the two most prominent mortgage firms to shut down in response to the market's downturn so far this year. Other lenders have laid off a combined thousands of professionals, exited lending channels and undertaken significant cost-cutting measures.