Government LendingLegalMortgageOrigination

Defunct Sprout agrees to pay $3.5M for unpaid wages

Company has reached a settlement with over 800 former employees in four lawsuits in California and New York

Sprout Mortgage and its ex-workers are close to settling several lawsuits over unpaid wages following the abrupt closure of the non-QM lender 11 months ago. A judge has yet to approve the deal.

On June 1, attorneys representing the former employees filed a notice of motion for preliminary settlement approval in a federal district court in New York. The document states that Sprout will pay $3.5 million to over 800 ex-workers for unpaid wages, per the parties’ agreement. 

Four lawsuits filed in New York and California are part of the settlement, which names Sprout, its affiliated company Recovco Mortgage Management LLC, and former top executives, including its founder Michael Strauss, as defendants. 

Defunct Long Island-based Sprout, led by industry veteran Strauss, informed hundreds of workers it was closing its doors on July 6 after a sharp rise in mortgage rates saddled the company with loans it was unable to sell to investors in the secondary market at par. 

HousingWire previously reported that ex-employees alleged the company did not pay the former employees’ last paychecks and severance package. The company also canceled health insurance coverage retroactively to May 1, resulting in several lawsuits against the lender.

In the request for the settlement approval, the plaintiff’s attorneys said they do not “believe Defendants even have a defense to the allegation that the Company failed to pay its employees for several weeks of work performed once the corporate entities shut down.”

To justify the settlement, the attorneys wrote, “Our primary concern has been the limited assets left in the accounts of the Corporate Defendants (Sprout and Recovco) and our ability to collect on a judgment against the primary individual defendant, Michael Strauss.”

The negotiations started seven months ago and included two mediations, in-person and virtual meetings and dozens of phone conferences. 

In October 2022, plaintiffs demanded about $20 million in unpaid wages, liquidated damages, and damages under the federal WARN and COBRA notice violations. In turn, the company responded that it would not have the financial ability to “pay an eight-figure judgment and that the collection risk against Strauss was high.”

“We learned many potentially valuable assets were, in fact, encumbered or no longer in Defendant Strauss’ possession. This information helped us to offer principled advice to our clients regarding settlement decision making,” plaintiffs’ attorneys wrote in court filings. 

Strauss is reportedly trying to sell a property at 610 Park Avenue in New York for $22.5 million and has started a new mortgage company. However, he is facing some resistance. Strauss and his company, Smart Rate Mortgage, appealed in April a decision from an Illinois regulator to suspend their licenses to operate in the state. Meanwhile, the licenses remain active.  

Scott Simpson, one of the attorneys for the plaintiffs at Menken Simpson & Rozger LLP, said in an email to HousingWire that the timeline for former employees to receive compensation will depend on when the court rules on the motion and any further dates set by the court.  

“If the court approves the settlement, a settlement administrator will send checks out to eligible class members,” Simpson said. 

“Our clients have no comment at this time,” Marc Wenger, an attorney for the defendants at Jackson Lewis P.C., said.

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