Litigation Financier’s Battle Against Sysco Provides Food for Thought

Cloaked in secrecy, neither the terms of litigation financing agreements nor the attendant scuffles between financier and claimant, are typically aired in public. That changed for about four months of 2023, during which Sysco, a food distributor, and Burford Capital, a multi-billion dollar litigation financing firm, duked it out in federal and state court over who had final say over the decision to settle Sysco’s antitrust claims against its food suppliers.

Burford had invested over $140 million in these claims in exchange for a share of proceeds from a favorable settlement or judgment.[i] Given the size of its investment, Burford wanted to maximize its financial return, which meant vigorously litigating the merits, whereas Sysco, concerned about preserving its relationships with food suppliers going forward, wanted to settle. In light of these competing interests, the crux of the dispute centered on Sysco’s claim that Burford, relying upon a provision in the financing agreement giving it a consent right over settlement, was “blocking Sysco from executing…settlements [with food suppliers] and forcing Sysco to continue to litigate against its will,” because “Burford wants to roll the dice on Sysco’s claims, hoping that something good will happen in the future that will make them more valuable.”[ii] 

The Funding Industry and the Champerty Prohibition

Blossoming over the last 15 years, litigation finance firms fund lawsuits with non-recourse capital, meaning that the funder only realizes a gain on its investment if the plaintiff obtains a recovery. Because of the non-recourse nature of the funding, funding firms devote significant resources to conducting a granular analysis of the strengths, weaknesses, and legal risks of every potential claim (known in the finance world as “underwriting”). Theoretically, this sifting process by a disinterested third party fosters a more efficient market for legal claims by allocating capital to the most meritorious ones with a high likelihood of success. It further ensures that plaintiffs with a valid claim, but an inability to bear the costs of prosecuting it, have their day in court. Burford Capital itself invested approximately $928 million in 2022 on behalf of companies and law firms to fund complex commercial disputes, including intellectual property, bankruptcy, securities, and — in what gave rise to this recent dispute — antitrust claims.[iii]

Because these arrangements involve a third party taking an interest in a lawsuit, they implicate the kindred prohibitions on champerty, barratry, and maintenance, ancient doctrines dating back to Greek and Roman law. Simply stated, “maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a continuing practice of maintenance or champerty.”[iv] The three are prohibited to “battle the ills associated with the commodification of litigation,” including the “strife, discord and harassment” that would likely ensue if third parties “stirred up” frivolous and vexatious suits that should be brought and controlled by the real party in interest.[v]

Nonetheless, recognizing the realities of modern financial transactions, courts have been chipping away at these ancient doctrines. For instance, in New York, whose law governed the funding agreement between Sysco and Burford,[vi] although there is a statute prohibiting the assignment or purchase of claims for the purpose of suing on them,[vii] courts have narrowly interpreted the statute as being violated only where the assignment’s primary purpose is to bring suit.[viii]  Thus an agreement between two companies to split the proceeds of any recovery on claims belonging to a corporation whose assets the companies were acquiring, did not violate New York’s champerty statute because the agreement was incidental to a larger commercial transaction.[ix] Similarly, the champerty prohibition was not violated by the acquisition of a mortgage and the subsequent initiation of a foreclosure action on the encumbered property, because the purpose of the mortgage acquisition was not purely to bring a foreclosure action, but rather to obtain repayment of the debt, a legitimate business purpose, which could have occurred without litigation.[x] By contrast, the acquisition of distressed debt by a firm whose business model is to “purchase an investment that has suffered a major loss from a company so that the company does not need to report such loss on its balance sheet…[and] commence litigation to recover the loss…[by] partner[ing] with specific law firms…to conduct litigation” does violate the statute.[xi]

Where do litigation funders fall on this spectrum? It should be noted here that funders traditionally do not purchase or take over claims from plaintiffs. Hence a New York appellate court has held that an investment by a funding firm in the first $500,000 of litigation, along with an agreement with the claimant to divide the first $4.8 million recovered, did not violate the champerty statute because the funding firm was not the plaintiff bringing the suit.[xii] The Northern District of Illinois reached the same conclusion in a case involving third-party financing, holding there was no “intermeddling” or “stir[ring] up a suit” by the funder in the sense contemplated by the champerty prohibition; to the contrary, “[t]he funder was sought out by a cash-strapped litigant embroiled in bitterly contested litigation.”[xiii]

In line with this reasoning, funders seek to assure the public of their non-interference in the litigation process. As far back as 2011, when the funding industry was still in its early days, Burford told the American Bar Association that it “does not hire or fire the lawyers, direct strategy or make settlement decisions. Burford is a purely passive provider of non-recourse financing to a corporate party.”[xiv]

Breaking Down the Dispute Between Sysco and Burford

It all began over the price of chicken. A 2016 class action on behalf of food distributors alleged price-fixing, in violation of the federal antitrust laws, by chicken suppliers in the United States.[xv] Sysco opted out of the class and filed a direct action.[xvi] In the next couple of years, similar antitrust class actions were brought against pork and beef suppliers.[xvii] Again, Sysco opted out of these actions and brought its own direct suits.[xviii]

Around 2019, Burford decided it was worth investing in Sysco’s antitrust claims, and so made a proposal to Sysco’s counsel, Boies Schiller.[xix] Following negotiations, Burford and Sysco entered into a Capital Provision Agreement (the “CPA”) setting forth the terms governing Burford’s investment.[xx] Pursuant to this arrangement, Burford ended up providing Sysco with over $140 million in capital, on a non-recourse basis, collateralized by the proceeds of any recovery on the claims.[xxi]

While the CPA was filed under seal, several key provisions concerning the extent of Burford’s control over the claims were revealed in court papers. Per the CPA, Burford and its affiliates were “passive providers of external capital,” and Sysco “remains in full control of the assertion and resolution of the claims.”[xxii]  Indeed, Burford continued to emphasize that its role was limited to monitoring its investments.[xxiii]  As a Burford Senior Vice President put it at a judicial symposium held in October 2022, “I don’t know how to say this more clearly, we don’t control settlement.”[xxiv]

The CPA also contained an anti-assignment provision prohibiting Sysco from assigning all or any portion of its antitrust claims.[xxv] Notwithstanding this prohibition, Sysco went ahead and assigned portions of its claims to customers down the supply chain who were indirect purchasers of the food products sold by the defendants. In an attempt to settle matters,[xxvi] the parties amended the CPA to increase Burford’s economic stake in the unassigned claims.[xxvii] Because Burford now had a larger stake in the claims, it grew concerned about a misalignment of incentives between it and Sysco, in particular that Sysco may not be as incentivized as Burford to prosecute the claims zealously, opting instead for a low-ball settlement.[xxviii]  To safeguard against this, the parties further amended the CPA  to include a provision giving Burford some say over settlement. The provision stated that Sysco “shall not accept a settlement offer without [Burford’s] prior written consent, which shall not be unreasonably withheld.”[xxix]

Triggering this provision, Sysco negotiated settlements with several food suppliers over the course of 2022.[xxx] Burford objected to the settlements believing they undervalued Sysco’s claims.[xxxi] Unable to reach a resolution, Burford commenced arbitration in the London Court of International Arbitration seeking to enjoin Sysco from executing on the settlements.[xxxii]  After much back and forth among the parties and the arbitral Tribunal, during which time Sysco terminated its counsel, Boies Schiller, believing it was violating its fiduciary duties by assisting Burford in impeding the settlements, the Tribunal eventually entered a preliminary injunction enjoining Sysco from executing the settlements.[xxxiii]

The Tribunal reasoned that Burford, as funder, bore the direct economic risk either of the settlement offers being withdrawn or of undervalued settlements creating a negative ripple effect for similar claims by Sysco that Burford was financing.[xxxiv] Further, Sysco’s point that it was being forced to litigate to maximize Burford’s return was merely a consequence of Sysco choosing to enter a contract that gave Burford a consent right over settlement.[xxxv] The Tribunal held, while “[e]very litigant has the autonomy to decide when and whether to settle…[e]very litigant also has the autonomy to contract that right away unless there is some legal or ethical barrier to doing so.”[xxxvi] And, as to these legal or ethical barriers,“[w]hatever remains of champerty does not appear to pose [] a barrier,” to a settlement consent right.[xxxvii]  On these grounds, the Tribunal concluded that injunctive relief was warranted because Burford had demonstrated a likelihood of success on the merits, Burford would be irreparably harmed absent injunctive relief, and the balance of equities favored Burford.

The parties each moved to confirm and vacate the award. Burford moved to confirm in New York Supreme Court, while Sysco, which had already brought a petition to vacate in the Northern District of Illinois, removed Burford’s state court action to the Southern District of New York, and filed a motion to transfer that action to the Northern District of Illinois.[xxxviii]

The procedural morass aside, Burford framed the matter as a garden variety contract breach. Burford’s position, which the Tribunal agreed with, was that Sysco threatened to violate the CPA by executing settlements without Burford’s prior written consent, thus necessitating the Tribunal’s preliminary injunction award. As Sysco would have it, the Tribunal’s interpretation of the CPA violated public policy by allowing the litigation funder to take control of settlement.[xxxix] In its view the preliminary injunction award was “litigation funder Burford Capital Limited’s secret dream come true: unfettered control over the settlement of its clients’ federal antitrust litigation claims.”[xl] “That Burford wants complete control of the settlement and litigation of Sysco’s claims can no longer be in doubt. The only question that remains is whether Burford will be permitted to complete its hostile takeover of Sysco’s position as the plaintiff and litigate in Sysco’s name.”[xli]

Resolution: Funder Becomes Plaintiff

In fact, Burford’s takeover as plaintiff is precisely how the parties ultimately resolved their dispute. Pursuant to a settlement between Burford and Sysco, Sysco assigned its claims to Carina Ventures, LLC, a Burford created entity.

Sysco and Burford thus stipulated to dismiss their dispute on June 28, 2023,[xlii] and a month later Carina Ventures commenced an antitrust action against the food suppliers in the Southern District of Texas.[xliii] The complaint in this new action describes Carina Ventures as “a Delaware limited liability company, which on or around June 28, 2023 acquired various assets of [] Sysco, including the claims that are the subject of this action, by way of a written assignment.”[xliv] Carina Ventures is represented by Sysco’s former counsel in the antitrust case, Boies Schiller.[xlv] The assignment agreement between Sysco and Carina Ventures is not publicly filed, though it may be as the litigation progresses, in which case the terms of the assignment, including the price of the claims, would be valuable information to participants in the funding industry.

Future Implications

It is understandable that funders, having made a substantial investment in identifying meritorious claims, want to pursue them to the finish. Under these circumstances, does the champerty doctrine bar them from purchasing the claims via assignment?

The answer may lie in the place of jurisdiction. “Texas has never recognized the common law doctrine of champerty,”[xlvi]  which may be why Burford chose to bring the claims it had purchased there. By contrast, in New York, whose law governed Burford’s original funding agreement (i.e. the CPA), Judiciary Law § 489 prohibits “a corporation or association” from buying or taking an assignment in a claim “with the intent and for the purpose of bringing an action or proceeding thereon.”[xlvii] Applying Judiciary Law § 489, even recently New York courts have not hesitated to void and dismiss claims obtained by assignment where the “primary purpose…was for plaintiff to pursue litigation against defendants on the claims in exchange for a portion of the proceeds from the litigation.”[xlviii] Here, because Sysco wanted to settle the claims, its assignment to Burford so Burford could keep litigating lends the impression that the “claims would not be prosecuted if not stirred up,” which is “the very mischief the [champerty] statute seeks to avoid.”[xlix] Similar considerations regarding third-party interference also drive the determination in other states — including those that have limited or abolished the champerty doctrine — as to whether or not an assigned or financed claim can proceed.[l]

Based on all this, it appears that as of today the most surefire way for a funder to safely purchase a claim by assignment is to have a basis for Texas jurisdiction, or possibly Texas choice of law. Burford’s alleged basis is that the food supplier defendants each transacted business in Texas, committed antitrust violations in Texas, and consented to personal jurisdiction in Texas as a condition of doing business there.[li] However, without a hook for Texas jurisdiction, at least for now, funders risk dismissal by purchasing the claims they fund as a solution to any tug of war with claimants over litigation strategy. This is especially so where the tug of war leading up to the purchase hinges on the funder’s preference to litigate versus the claimant’s to settle, the proverbial stirring of a suit.

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[i] Amended Petition to Vacate Arbitration Award, March 20, 2023 (“Amended Petition”), 23-Cv-1451, Doc. No. 18,¶ 21 (N.D. Ill. 2023); Burford Motion to Stay, 23-Cv-1451, Doc. No. 27, p. 2 (N.D. Ill. 2023).

[ii] Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 18 (N.D. Ill. 2023).

[iii] https://www.burfordcapital.com/about-us/.

[iv] Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363, 372 (2d Cir. 1999) (citing In re Primus, 436 U.S. 412, 425 n. 15 (1978).

[v] Aretakis v. Caesars Ent., 2018 WL 1069450, at *9 (S.D.N.Y. Feb. 23, 2018); Trust For the Certificate Holders of Merrill Lynch Mortg. Invs., Inc. v. Love Funding Corp., 13 N.Y.3d 190, 201 (2009).

[vi] Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 22 (N.D. Ill. 2023).

[vii] N.Y. Judiciary Law § 489.

[viii] Elliott Assocs., L.P. v. Banco de la Nacion, 194 F.3d 363, 372-77 (2d Cir. 1999) (citing cases); Bluebird Partners, L.P. v. First Fid. Bank, N.A., 94 N.Y.2d 726, 736 (2000).

[ix] Fairchild Hiller Corp. v. McDonnell Douglas Corp., 28 N.Y.2d 325, 330 (1971).

[x] Limpar Realty Corp. v. Uswiss Realty Holding, Inc., 112 A.D.2d 834, 836 (1^st Dept. 1985).

[xi] Justinian Cap. SPC v. WestLB AG, 28 N.Y.3d 160, 164 (2016).

[xii] Wimbledon Fund, SPC v. Weston Cap. Partners Master Fund II, Ltd., 184 A.D.3d 448, 449 (1^st Dept. 2020).

[xiii] Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 725 (N.D. Ill. 2014).

[xiv] Expert Report of Maya Steinitz in Support of Sysco’s Petition, 23-Cv-1451, Doc. No. 1-2, p.9 (N.D. Ill. 2023) (citing ABA Comm’n on Ethics 20/20 Informational Report to the House of Delegates 23 n. 82 (2011), quoting Comments of Burford Group, LLC to the Am. Bar Ass’n Working Group on Alternative Litig. Fin. 5 (Feb. 15, 2011).

[xv] Amended Petition, 23-Cv-1451, Doc. No. 18,¶¶ 18, 20 (N.D. Ill. 2023).

[xvi] Id.

[xvii] Id.

[xviii] Id.

[xix] Id. at ¶ 21.

[xx] Id. at 22.

[xxi] Burford Motion to Stay, 23-Cv-1451, Doc. No. 27, p. 2 (N.D. Ill. 2023).

[xxii] Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 22 (N.D. Ill. 2023) (citing Law & Economics Center, Panel 6: The Evolution of Third-Party Litigation Funding, Sixteenth Annual Judicial Symposium on Civil Justice Issues (Oct. 10, 2022), https://masonlec.org/events/sixteenth-annual-judicial-symposium-on-civil-justice-issues/).

[xxiii] https://www.burfordcapital.com/how-we-work/  (“As passive capital providers we monitor investments to help maximize value for our clients.”).

[xxiv] Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 23 (N.D. Ill. 2023).

[xxv] Burford Motion to Stay, 23-Cv-1451, Doc. No. 27, pp. 3-4 (N.D. Ill. 2023).

[xxvi] Sysco defended its assignments as necessary to minimize litigation risk from customers who had asserted a contractual right to an assignment. Sysco asserted that had it not assigned its claims, it could have faced lawsuits from its customers. (Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 25 (N.D. Ill. 2023)).

[xxvii] Burford Motion to Stay, 23-Cv-1451, Doc. No. 27, pp. 4 (N.D. Ill. 2023).

[xxviii] Id.

[xxix] Id. at pp. 4-5.

[xxx]  Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 29 (N.D. Ill. 2023).

[xxxi] Amended Petition, 23-Cv-1451, Doc. No. 18,¶¶ 31, 34 (N.D. Ill. 2023).

[xxxii] Amended Petition, 23-Cv-1451, Doc. No. 18,¶¶ 41, 46  (N.D. Ill. 2023). The CPA had a dispute resolution clause mandating arbitration by the London Court of International Arbitration for any disputes arising out of or related to the CPA. (Glaz LLC, et. al. v Sysco Corporation, Index No. 651289/2023, Dkt. No. 1, ¶ 16, (N.Y. Sup. Ct. 2023)).

[xxxiii] Amended Petition, 23-Cv-1451, Doc. No. 18,¶¶ 18, 38, 40, 51, 62 (N.D. Ill. 2023); Burford Motion to Stay, 23-Cv-1451, Doc. No. 27, p. 8 (N.D. Ill. 2023).

[xxxiv] Glaz LLC, et. al. v Sysco Corporation, Index No. 651289/2023, Dkt. No. 5, Tribunal Award, pp. 60-61, 76 (N.Y. Sup. Ct. 2023).

[xxxv] Id. at 76.

[xxxvi] Id. at 69.

[xxxvii] Id. at 69-70. In so holding the Tribunal primarily looked to New York’s champerty laws as the CPA was governed by New York law. Glaz LLC, et. al. v Sysco Corporation, Index No. 651289/2023, Dkt. No. 1, ¶ 18, (N.Y. Sup. Ct. 2023).

[xxxviii] The underlying antitrust suit by Sysco was pending in the Northern District of Illinois.

[xxxix] Amended Petition, 23-Cv-1451, Doc. No. 18,¶ 65 (N.D. Ill. 2023).

[xl] Id. at p. 2.

[xli] Id. at ¶ 72.

[xlii] Stipulation of Dismissal, 23-Cv-1451, Doc. No. 56 (N.D. Ill. 2023).

[xliii] Carina Ventures, LLC v. Agri Stats, Inc. et. al., 4:23-cv-02685, Complaint, Doc. No. 1 (S.D. Tex. 2023).

[xliv] Id. at ¶ 28.

[xlv] Id. at p. 58.

[xlvi] Oasis Rsch., LLC v. Adrive, LLC, 2013 WL 12146522, at *4 (E.D. Tex. Mar. 1, 2013) (citing Glenney v. Crane, 352 S.W.2d 773, 780 (Tex. Civ. App. 1961), writ refused NRE (May 16, 1972)).

[xlvii] N.Y. Judiciary Law § 489 (1). “[C]orporation or association” has been interpreted to include a limited partnership, meaning that it will probably also be interpreted to include a limited liability company such as Carina Ventures, LLC. Elliott Assocs., L.P. v. Republic of Peru, 12 F. Supp. 2d 328, 356 n. 20 (S.D.N.Y. 1998), rev’d on other grounds, 194 F.3d 363 (2d Cir. 1999). Burford itself is a corporation.

[xlviii] Leasing Control Inc. v. 500 Fifth Ave., Inc., 193 A.D.3d 592 (1^st Dept. 2021); Sharbat v. Iovance Biotherapeutics, Inc., 2023 WL 34377, at *17 (S.D.N.Y. Jan. 4, 2023) (assignment of contract claim void as champertous where sole purpose was to retain cause of action); Phoenix Light SF Ltd. v. HSBC Bank USA, Nat’l Ass’n, 2022 WL 1266632, at *6 (S.D.N.Y. Apr. 28, 2022) (plaintiff lacked standing to sue where reassignment to it of RMBS certificates was for intent and purpose of bringing litigation).

[xlix] Love Funding, 13 N.Y.3d at 201; Ehrlich v. Rebco Ins. Exch., Ltd., 225 A.D.2d 75, 77 (1^st Dept. 1996) (assignment that occurred after plaintiff brought suit still held champertous because of assertion of additional claims based on assignment).

[l] Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 725 (N.D. Ill. 2014) (litigation funding agreement may be champertous if it “wickedly and willfully tried to stir up a suit”); Maslowski v. Prospect Funding Partners LLC, 944 N.W.2d 235, 241 (Minn. 2020) (“[c]ourts and attorneys should likewise be careful to ensure that litigation financiers do not attempt to control the course of the underlying litigation, similar to the ‘intermeddling’ that we described in our early champerty precedent”); Osprey, Inc. v. Cabana Ltd. P’ship, 340 S.C. 367, 383 (2000) (although abolishing the ancient champerty doctrine, holding that a “financier becomes an officious intermeddler when he or she offers unwanted advice or otherwise attempts to control the litigation for the purpose of stirring up strife or continuing a frivolous lawsuit”); Odell v. Legal Bucks, LLC, 192 N.C. App. 298, 309 (2008) (an outsider’s involvement in a lawsuit does not constitute champerty or maintenance “unless the interference is clearly officious and for the purpose of stirring up strife and continuing litigation”).

[li] Carina Ventures, LLC v. Agri Stats, Inc. et. al., 4:23-cv-02685, Complaint, Doc. No. 1, ¶ 26 (S.D. Tex. 2023).