Sprout stops worker settlement over involuntary bankruptcy

Sprout Mortgage is halting a $3.5 million settlement for laid off workers, citing an involuntary bankruptcy filing posted recently by the shuttered lenders' creditors who are seeking payment. 

Attorneys for Sprout filed a stay of proceedings July 12, citing court rules suggesting no judgments could be enforced against the company because of the active bankruptcy proceeding. The lender abruptly shut down last July, prompting lawsuits from ex-employees and mortgage partners seeking to fulfill debts.

Three lenders earlier this month filed for Chapter 7 bankruptcy on behalf of Sprout in a New York federal court, seeking a combined $1.3 million allegedly owed from mortgage purchase agreements. Sprout, unlike other struggling mortgage firms, didn't file for bankruptcy. 

Laid off employees were awaiting a judge's approval of an agreed upon multimillion dollar settlement, and approximately 800 ex-workers would be eligible to receive compensation, lawyers previously said. Counsel for Sprout last week wrote they could initiate contempt proceedings against any party that attempts to violate the automatic stay.

An attorney for Sprout declined to comment Friday. Lawyers for the former employees said they're assessing their options to protect their clients' claims. They didn't say whether employees received over $1 million in funds that were due to be paid last month, according to the settlement filing. 

"We are continuing to work as hard as we can to get the former Sprout employees the compensation they are owed and deserve," said attorneys for employees in a statement. 

Along with the employee suit, Sprout faces three pending complaints from creditors in federal courts for failing to fulfill loan purchase agreements. A federal judge in May ruled Family First Funding was entitled to $475,000 from Sprout over a loan purchase dispute. 

In the involuntary bankruptcy filing earlier this month, New Wave Lending Group is seeking $561,501.60; JMJ Financial Group is asking for $198,670; and EF Mortgage is pursuing a $585,475.40 sum from Sprout. A summons was served on a corporate registered agent on behalf of Sprout Wednesday.

Strauss, the embattled leader of the former East Meadow, New York-based company, recently attempted to form a new mortgage company and originate loans in Illinois. He's currently appealing a suspension of his origination license in that state.