Sprout Mortgage bankruptcy filing holds up $3.5 million settlement with employees

Employees of Sprout Mortgage, a Long Island company that shut down suddenly last year, have entered into a preliminary settlement agreement in which the company would pay $3.5 million over claims it violated federal and state labor law.

But three financial firms that say Sprout owes them money filed a petition last month in U.S. Bankruptcy Court in Central Islip to declare Chapter 7 bankruptcy on Sprout’s behalf. The creditors separately requested a judge block Sprout from moving forward with the settlement while the company is in bankruptcy.

On July 6, 2022, a Sprout executive informed employees during an afternoon Zoom call that the company was terminating all its employees, effective immediately. Workers had been scheduled to receive paychecks for the last two weeks in June the following day, but they didn’t arrive.

About 548 employees were terminated that day, according to court documents, and around 100 worked in Sprout’s East Meadow office. 

Sprout specialized in non-qualified mortgages. A qualified mortgage must meet certain requirements that make it more likely the loan will be paid back. Non-qualified mortgages can include other more risky features and became increasingly unattractive to investors as mortgage rates rose.

Sprout also canceled its employee’s health insurance retroactive to May 1 even though it had been deducting health insurance premiums from employees’ paychecks for May, June and the first week of July. It had failed to forward that money to its health insurer and employees began to receive bills from health care providers for care they received during those months, the employees’ attorneys wrote in court filings.

Two days after Sprout’s shutdown, several employees filed a class-action lawsuit against the company and its CEO, Michael Strauss, in U.S. District Court in Central Islip, alleging federal and state labor law violations.  It later amended that complaint to include violations of ERISA, the federal law that requires employers to act prudently in administering employee benefit plans.

Nearly a year later, in June, Sprout agreed to a preliminary settlement of $3.5 million with its former employees and sought approval from Judge Joan Azrack. The company also asked to consolidate the case with three other class-action lawsuits filed by employees in California.

"Given the high likelihood that even if Plaintiffs were to secure a judgment against Defendants they could not enforce it, it is clearly in the best interest of class members to settle now while there are still available assets to be distributed," Bruce Menken, partner at Menken, Simpson & Rozger in Manhattan and the employees' attorney, wrote in a memo in support of the settlement in June.

But last month three creditors filed an involuntary bankruptcy petition and asked Azrack to stop the settlement from moving forward. The three creditors are New Wave Lending Group, JMJ Financial Group and EF Mortgage, which are owed a combined $1.3 million.

Attorneys for Sprout’s employees asked the judge to continue to review the motion for preliminary approval of the settlement. It noted that the class-action lawsuit was filed not just against Sprout but against Recovco Management, a related entity, and Michael Strauss, Sprout’s CEO. Only Sprout Mortgage is in bankruptcy. Recovco and Strauss joined the plaintiffs in asking that the judge continue to review the settlement, according to a court filing.

Menken declined to comment on the case. Attorneys for Sprout Mortgage and the creditors that filed for bankruptcy on its behalf did not respond to requests for comment.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.