Former Sprout Employees Get Caught In The Middle

Sprout Mortgage's abrupt closure in July 2022 is the drama that just keeps going. In the latest development, a federal bankruptcy judge halted the disbursement of $1.95 million previously allocated for the company's former employees. 

Originally, over 100 ex-employees were set to receive a total of $3.5 million from a class action settlement. However, as Sprout undergoes Chapter 11 bankruptcy proceedings, a trustee overseeing the case requested the court to stop this payout. This bankruptcy case was initiated by creditors, following Sprout's prolonged failure to address its individual claims.

On December 1, U.S. Bankruptcy Judge Robert Grossman ordered that the majority of these settlement funds, held by Settlement Services, Inc., remain undistributed pending his further instructions. The attorneys representing the laid-off employees, foreseeing this situation, are now pursuing legal action against Sprout's former executives directly, aiming to bypass the complications related to the company's bankruptcy.

Judge Robert Grossman also issued a contempt order against Shea Pallante, Sprout's former president, for not complying with court mandates to produce certain documents and provide a deposition. Court documents say that efforts to reach Pallante have been ongoing since August.

Pallante, known for informing employees of their termination via a video call, was appointed chief production officer at Non-QM lender Arc Home in March. Following the contempt order, an attorney for the bankruptcy trustee sent notices to both Arc Home's headquarters and Pallante's residence in Tennessee. As of December 13, Pallante faces a daily fine of $500, which has accumulated to over $22,000.

Despite multiple attempts, Pallante has not provided any comments on the matter. Judge Grossman has indicated that Pallante could face arrest and detention in his home jurisdiction if he continues to disregard court orders. There has been no response from the trustee's attorney regarding the potential for Pallante's detention.

In a related development, Elizabeth Strauss, the wife of Sprout's former CEO Michael Strauss, avoided a contempt charge by eventually submitting documents and appearing for a deposition, as stated in a November court filing.

Sprout Mortgage is entangled in several legal issues, owing $66 million in both secured and unsecured claims to various entities in the mortgage sector. The lender itself never filed for bankruptcy, and allegations have surfaced that Michael Strauss transferred $24.4 million from Sprout to his personal accounts. Post-Sprout, Michael Strauss briefly ran Smart Rate Mortgage, generating over $5 million in loans before his origination license was revoked by an Illinois regulator earlier this year.