Sprout Mortgage has $66 million in combined secured and unsecured claims from ex-employees, mortgage lenders, depositories, regulators and industry vendors, according to a bankruptcy filing in September. A federal judge is expected this week to convert Sprout's involuntary Chapter 7 bankruptcy petition, filed by its creditors, to a Chapter 11 bankruptcy case.

That petition has stonewalled a $3.5 million settlement to laid-off staff seeking alleged back pay from the Sprout's abrupt shutdown last July. Of that amount, $1.95 million sits in an escrow account, funds that a trustee in the bankruptcy case is asking a court to hold. 

Attorneys for the class of over 100 former employees want to continue their wage lawsuit against former Sprout executives, including ex-CEO Michael Strauss, exclusive of the company itself. The defendants oppose that move, and counsel for the workers accuse executives of hiding behind the bankruptcy case that could take years to conclude. 

"This is wrong as it is the Plaintiffs who have been repeatedly handicapped and prevented from obtaining their unpaid salary, wages and WARN damages due to the actions of Sprout and these individual Defendants," the attorneys wrote. 

They also accused Strauss of claiming poverty despite living in a multimillion dollar Hamptons residence, owning a pricey Park Avenue townhouse in New York City and attempting to run a new business. 

An attorney for Strauss declined to comment this week, while an attorney for plaintiffs didn't respond to a request for comment. 

Counsel for the class action plaintiffs cite approximately 600 mortgage employees who suffered around $20 million in damages from Sprout. The East Meadow, New York-based lender closed its doors last July, the second mortgage firm to do so after First Guaranty Mortgage Corp. shuttered a month earlier. 

Bankruptcy filings reveal a complicated picture of Sprout and Strauss' finances both before and after the company shut down. Strauss allegedly received $24.4 million from Sprout parent Recovco Mortgage Management almost a year before the involuntary bankruptcy filing, according to filings by the independent trustee. That move led the trustee to speculate as to why Strauss did not immediately file for Chapter 11 protection for the lender. 

"It was either a refusal to prepare the schedules by Mr. Strauss, or an inability of the Debtor to do so separate and apart from Mr. Strauss and the professionals in his corner," wrote the trustee, referring to the schedules which detail creditor claims. "Either situation is reason for concern. Either is indicative of postpetition problems."

Case filings also reveal additional lawsuits against Sprout in state courts, including a claim from PNC Bank. The depository, according to filings, accuses Sprout of commingling mortgagor payments in its general operating accounts instead of delivering the funds to a lockbox.

Sprout did not list its gross revenue for 2022 but claimed it made $160 million in 2021. It also alleged two of the lenders who filed the involuntary bankruptcy in July owe it a combined $12.5 million for various claims. 

Strauss' wife, Elizabeth Strauss, also disregarded a court order requiring her to produce documents and testimony related to the bankruptcy, according to additional filings. She allegedly created Smart Rate Mortgage, a Florida-based company for which Michael Strauss briefly gained an origination license.

The trustee in the bankruptcy case said earlier this year he was attempting to determine if Sprout's assets were transferred to Smart Rate. After a brief appeal earlier this year, an Illinois regulator revoked Strauss' license. He still originated $5.56 million in volume this year, according to data cited by HousingWire.