A January 4, 2016 opinion in the Southern District of Texas by Judge Keith Ellison (“Op.”) in the In re: BP p.l.c. Securities Litigation, MDL No. 4:10-md-2185, has taken up the issue of whether plaintiffs can properly assign their claims to entities created solely for the purpose of litigating those claims. The court found that these assignments were invalid, which may give plaintiffs in other disputes pause before pursuing the same course in the future. This decision is an interesting contrast to the recent decision we covered in the In re Petrobras Securities Litigation, No. 14-cv-9662 (S.D.N.Y.) consolidated litigation, where certain opt-out plaintiffs whose assignments were challenged were allowed to proceed with their cases.

This Opinion was issued in one of the opt-out actions filed against BP stemming from the 2010 Deepwater Horizons oil spill. As in the class-actions background, the opt-out plaintiffs allege that that BP and related entities “violated Sections 10(b) and 20(a) of the Securities Exchange Act.” (Op. at 1.) According to Judge Ellison, “[t]he most noteworthy factual wrinkle pertains to the identity of the Plaintiffs: BP Litigation Recovery and BPLR (the “Assignee Plaintiffs”) are not actual purchasers of BP securities.” (Op. at 2.) Instead, “the Assignee Plaintiffs are special purpose entities created by actual purchasers of BP American Depositary Shares (ADS) to serve as litigation vehicles for their Exchange Act claims in this action.” (Op. at 2.) Aside of being assigned the right to litigate this dispute by certain purchasers of BP ADS, “[t]here is no suggestion that the Assignee Plaintiffs have, or ever will have, any function in any other litigation or non-litigation context.” (Op. at 2.)

The decision by these opt-out plaintiffs to assign their claims to a new entity created solely for the purpose of litigation is especially interesting since there is already a certified class covering the period April 26, 2010 to May 28, 2010, the period in which these assignors appear to have purchased BP shares. Still, these assignors elected not to participate in the class and instead bring their own cases in this novel fashion.

Defendants moved to dismiss, challenging the validity of these assignments and, consequently, the standing of the Assignee Plaintiffs. In the January 4 opinion, the Court held that “the Assignments must be disregarded for all purposes relevant to this litigation, and dismisse[d] the Assignee Plaintiffs’ Complaints for lack of standing.” (Op. at 6.) First, the Court rejected Defendants’ argument, relying on Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), that the assignments created evidentiary issues since none of the Assignee Plaintiffs had actually purchased BP securities. The Court held that the evidentiary problem in Blue Chip, namely “a plaintiff who alleges that he would have bought 1,000 shares of stock but for the company’s misrepresentation,” was “a far cry from Defendants’ argument … which is merely that the case will require the involvement of non-parties.” (Op. at 6.)

However, Defendants also argued, and the court agreed, that the assignments “raise several problematic procedural issues,” namely that “the Purchasers’ non-party status—which the Purchasers manufactured by assigning their claims to newly-formed shell companies—will have a prejudicial effect both on Defendants’ ability to litigate the case and the Court’s ability to adjudicate it.” (Op. at 10.) Without ascribing any ill intent to the plaintiffs here, the Court found a host of potential risks if this type of assignment is permitted:

With unfettered discretion to assign their claims, claimants could easily use assignments as a tool to manufacture the types of tactical advantages that Defendants attribute to the Assignee Plaintiffs here. A number of the burdens imposed by the Federal Rules of Evidence and Civil Procedure apply only to parties to litigation. A wily claimant, however, could skirt these obligations by assigning his claim to a litigation vehicle. With the litigation vehicle serving as the nominal plaintiff, the real claimant would potentially be beyond the reach of court sanctions, conventional discovery protocols, certain evidentiary rules, and other obligations that are incumbent upon parties to litigation.

(Op. at 11-12.) Although an assignment would be permissible if made for a legitimate business purpose, here “the claimants have struggled to articulate a business-related justification for assigning their claims to newly-formed shell companies.” (Op. at 14.) The Assignee Plaintiffs cited Sprint Commc’ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 271-72 (2008), in which “payphone operators assigned approximately 1,400 ‘dial-around’ claims to billing and collection companies called ‘aggregators.’” (Op. at 10.) Although the Court agreed that Sprint demonstrates the “long-standing rule allowing the assignment of legal claims,” but also pointed out that “it is equally clear that this general rule is not without exception.” (Op. at 11.) The Court noted that “the payphone operators in Sprint had a strong business case for assigning their claims to the aggregators,” namely that the expense of litigating a claim by a single operator would be expensive with a limited potential for monetary recovery. (Op. at 13.) “The existence of this strong business-related justification for the assignments suggests that they were made for ‘ordinary business purposes,’ not as a sham.” (Op. at 13.) The Court also noted that “the claims in Sprint were assigned to independently-owned and -operated entities in arm’s length transactions.” (Op. at 15.)

In contrast, the Court held that the Assignee Plaintiffs here could not show a similar business purpose or arm’s-length relationship. “[T]he Purchasers admit that they made the Assignments for the sake of expediency, not out of necessity,” yet “the expediencies proffered here seem marginal, at best.” (Op. at 14.) In contrast to the Assignee Plaintiffs’ arguments that allowing all the claims to be managed by one central entity would promote efficiency, “interjecting a middleman (the Assignee Plaintiffs) into the discovery process would do little to effect it.” (Op. at 14.) This is especially true since, the Court held, the assignments were not necessary to promote efficiency: “If the Purchasers thought it expeditious to hire a litigation manager, they could have contracted one through a services agreement and avoided Defendants’ 12(b)(1) motion altogether.” (Op. at 15.) (Although unexplained by the Court, a litigation manager oversees and manages a lawyer or legal team responsible for bringing or defending a lawsuit. Presumably the Court means that the purchasers of BP securities could have hired one litigation manager to handle all their claims instead of assigning the claims themselves to newly created entities.)

Because of these issues, the Court held the assignments “inoperable for the purposes of this litigation” and “dismisse[d] the Assignee Plaintiffs’ Complaints for lack of standing.” (Op. at 16.) Notably, the Court’s dismissal of those claims means that the would-be plaintiffs who assigned their claims to these specially created entities likely can no longer raise them on their own. Because the Deepwater Horizons explosion took place on April 20, 2010, the five-year repose period for Section 10(b) claims expired on April 20, 2015.

This case provides insight for groups of plaintiffs considering consolidating their claims. Courts are likely to view new entities created solely for the purposes of litigation with suspicion, and any such assignment of claims would need a legitimate business purpose. Plaintiffs considering this road should consider retaining litigation managers as an alternative, as the Court suggests, which would avoid these issues and help prevent dismissal due to lack of standing.