When the transponder fails, would ATC pickup my altitude response from my Stratus or any other ADS-B out instead? Is it legal to do so?
The Stratus does not broadcast. It recieves only. So that is no help.
If you had a stand alone UAT ADS-B transmitter. It might continue to broadcast your altitude if your transponder failed. The UAT requires an altitude input and it must be from the same source that your transponder gets it. Sometimes that gets wired directly from a 2nd output of your altitude encoder (bypassing the transponder which gets it from the 1st output) in which case it would continue to broadcast altitude. Sometimes the altitude wiring goes from your encoder to your transponder, then the transponder has an output that sends it to your ADS-B UAT. In this case it might fail if the transponder fails.
It might be useful to know that the ADS-B transmitter must broadcast your current transponder code (1200 for vfr). The UAT generally senses it automatically as the transponder broasdcasts it so you don't need to set it in 2 different controls. But if your transponder fails, it won't sense the code and may go into a fail mode on it's own (not sure about this though).
The advent of ADS-B brings no relaxing of the regulations regarding the requirement of using transponders.