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Former Sprout employees move to protect $3.5M settlement 

Agreement is at risk due to an involuntary bankruptcy petition filed by three creditors on Sprout's behalf

Ex-workers took action in a New York court this week to ensure that a $3.5 million settlement with Sprout Mortgage for unpaid wages goes through. It follows a request from the shuttered lender to halt the agreement due to an involuntary bankruptcy petition filed by three creditors.   

New Wave Lending GroupJMJ Financial Group and EF Mortgage filed on July 5 an involuntary petition against Sprout under Chapter 7 of the Bankruptcy Code in a New York court, claiming the lender owes $1.3 million on mortgage purchase agreements.  

One week later, Sprout’s attorneys requested to halt the agreement to pay $3.5 million to over 800 ex-workers for unpaid wages, which required seven months of negotiations, per court filings. The deal, made public on June 1, includes four New York and California lawsuits. 

On Thursday, attorneys for the former employees, Sprout’s affiliated company Recovco Mortgage Management and Michael Strauss, an industry veteran who founded the lender, requested that the court to continue its review of the settlement. 

“The bankruptcy proceeding was commenced only against Sprout, so consistent with the approach adopted by some cases under similar circumstances as those presented here, the parties request that the automatic stay only applies to the action against Sprout, not Recovco or Strauss,” an attorney for the former employees wrote in court filings. 

In addition, the parties requested that the judge allow the distribution of funds currently escrowed under the settlement reached before the involuntary bankruptcy petition. They claim that the escrowed funds are not the property of Sprout’s estate for bankruptcy. 

According to the document, Sprout has “nearly fully complied with the terms of the class settlement agreement, but for the last $300,000 payment.”

The document states that Recovco and Strauss are not admitting any liability but believe that under the circumstances present, it is in the interest of all parties for the settlement process to continue. 

Scott Simpson, one of the attorneys for the former employees at Menken Simpson & Rozger LLP, said he had no comment.

“Our clients still have no comment,” Marc Wenger, an attorney for the defendants Sprout, Recovco and Strauss at Jackson Lewis P.C., said.

Also due to the involuntary bankruptcy petition, Sprout’s attorneys moved to adjourn “without date” a pending motion and a hearing scheduled for August 3 on a lawsuit filed by Merchants Bank of Indiana.

Sprout’s lawyers mentioned in court filings Section 362 of the Bankruptcy Code, which gives debtor protection from creditors, among other things, from “the commencement or continuation of any judicial, administrative, or other action or proceeding” that was or could have been commenced before the bankruptcy court case.

Merchants Bank of Indiana claims in its lawsuit that it purchased a mortgage loan from Sprout, and the underlying borrowers subsequently tendered a full payoff of the mortgage loan to Sprout. Still, the company failed to remit it to Merchants as the parties’ written agreement required. The total value was $1.2 million.  

A representative for Merchants said the company had no comment. 

Long Island-based Sprout informed hundreds of workers and business partners it was closing its doors on July 6, 2022, when a sharp rise in rates saddled the company with loans it could not sell to investors in the secondary market at par. 

Ex-employees alleged the company did not pay their last paychecks and severance package. The company also canceled health insurance coverage retroactively to May 1, resulting in several lawsuits against the lender. The lender is also the target of lawsuits from former business partners. 

Strauss is reportedly trying to sell a property at 610 Park Avenue in New York for $19.9 million and has started a new mortgage company. But Strauss and his new 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.  

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