MEMORANDUM AND ORDER

KEITH P. ELLISON, District Judge.

Before the Court is Defendants' Motion to Dismiss Plaintiffs' Complaints (the "Motion").

I. BACKGROUND

Five years after the Deepwater Horizon oil spill, Plaintiffs Peak6 Capital Management LLC et al., BP Litigation Recovery I, L.L.C., and BPLR, L.L.C. (together, the "Plaintiffs") each filed a complaint (the "Complaints").1 They comprise the fourth "tranche" of individual actions in MDL No. 2185. The Complaints allege that Defendants BP plc, BP America, BP Exploration & Production Inc., Douglas Suttles, and Anthony Hayward (the "Defendants") violated Sections 10(b) and 20(a) of the Securities Exchange Act.2

The factual background of the spill warrants minimal attention here—it bears little relevance to Defendants' defenses and has already been recounted by this Court on multiple occasions. The 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. Instead, they are limited liability companies into which eight purchasers (the "Purchasers") of BP American Depositary Shares ("BP ADS") expressly contributed "all of their respective rights . . . in all claims and causes of action related to [their BP ADS shares]."3 In other words, the Assignee Plaintiffs are special purpose entities created by actual purchasers of BP ADS to serve as litigation vehicles for their Exchange Act claims in this action. There is no suggestion that the Assignee Plaintiffs have, or ever will have, any function in any other litigation or non-litigation context. Nor is there any suggestion that the Purchasers would be in any degree disadvantaged if they were to litigate their claims without the Assignee Plaintiffs.

Each Assignee Plaintiff is manager-managed and owned by two classes of members. The manager of each company holds a Class A membership interest and is "empowered to retain counsel and take the actions necessary and appropriate to prosecute the claims, including coordinating discovery requested from the Class B Members [i.e., the Purchasers] in connection with the prosecution of the Claims.'"4 The Purchasers each hold Class B membership interests and are entitled to all "Net Profits" distributed by the companies. Profits, to the extent that any arise from this litigation, will be allocated "pro rata based on the relative purchases of each Class B Member in the American Depository [sic] Shares of BP plc."5 The manager, as a Class A member, does not hold an equity stake in the companies and is not entitled to any distributions.6

II. LEGAL STANDARD

Defendants have moved to dismiss the Complaints under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Rule 12(b)(1) governs challenges to a court's subject matter jurisdiction. "A case is properly dismissed for lack of subject matter jurisdiction when the court lacks the statutory or constitutional power to adjudicate the case."7 In ruling on a Rule 12(b)(1) motion, "the court is permitted to look at evidence in the record beyond simply those facts alleged in the complaint and its proper attachments."8 "The plaintiff bears the burden of demonstrating that subject matter jurisdiction exists."9

To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), the complaint must contain sufficient factual allegations to state a claim to relief that is plausible on its face.10 "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."11 In considering a Rule 12(b)(6) motion to dismiss, the Court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in favor of plaintiffs.12

III. STANDING OF ASSIGNEE PLAINTIFFS

Defendants aver that the Purchasers' assignments to the Assignee Plaintiffs (the "Assignments") are inherently problematic. As a result, say Defendants, the Assignments should be rendered inoperable as a matter of law under Smith v. Ayers. While the Court agrees with Defendants' conclusion—the Assignments are indeed problematic and cannot stand— Defendants' reliance on Blue Chip and Smith is misplaced. Those cases turned on evidentiary concerns that differ in kind from the issues implicated by the Purchasers' assignments to the Assignee Plaintiffs.

The problem here is not one of evidentiary adequacy, but of procedural inequity. As Defendants correctly argue, the Purchasers have gained several procedural advantages as a result of the Assignments. Of still greater concern is the prospect that the Assignments were made for the purpose of manufacturing these procedural advantages—the Purchasers struggle to articulate any "ordinary business purposes" that can otherwise justify the assignment—and that future claimants could follow this template.13 The Court therefore holds that the Assignments must be disregarded for all purposes relevant to this litigation, and dismisses the Assignee Plaintiffs' Complaints for lack of standing.

A. Evidentiary Concerns under Blue Chip Stamps and Smith

"Assignees of a claim, including assignees for collection, have long been permitted to bring suit."14 But this general rule of assignability is not without exception. Some assignments have given rise to policy concerns that have led courts to invalidate the assignments and deny standing to the assignee. For example, it was on these grounds that the Fifth Circuit invalidated an assignment of Exchange Act claims in Smith v. Ayers,15 and Defendants urge this Court to do the same.

Smith instructs that Blue Chip Stamps v. Manor Drug Stores16 is the "guidepost case determining standing rules for 10b-5 actions."17 In Blue Chip, the Supreme Court narrowed Rule 10b-5 standing based principally on two policy considerations: (1) the danger that an expansion of the potential class of plaintiffs would result in "vexatious" litigation or "strike suits"; and (2) "the evidentiary problems inherent in allowing non-purchasers/sellers to bring a Rule 10b-5 action."18 The Fifth Circuit keyed its analysis of the Smith assignments on these two policy considerations, dismissing the assignee-plaintiff's claims because the "action [bore] all the hallmarks of a strike or nuisance suit, the very actions which Blue Chip Stamps seeks to reduce," and because the plaintiff would have to "necessarily rely heavily on his own `self-serving testimony'" to prosecute the claim.19

Defendants' motion to dismiss focuses on the latter of the Blue Chip policy considerations, arguing that the Assignee Plaintiffs' suit "would raise the exact evidentiary concerns set forth in Blue Chip Stamps."20 In 10b-5 claims, the purchaser's reliance on a misrepresentation is a key element. Yet here, argue Defendants, the Assignee Plaintiffs did not purchase BP ADS, and the actual purchasers—whose reliance ultimately must be proven—are not parties to this lawsuit. Thus, the plaintiffs' claims turn on the involvement of a non-party. According to Defendants, this makes the Assignee Plaintiffs "`the type of remote purchasers whose 10b-5 actions are discouraged by Blue Chip Stamps,'"21 and their complaints should be dismissed accordingly.

The Assignee Plaintiffs respond that Defendants' comparisons to the evidentiary concerns in Blue Chip (and, by extension, Smith) are inapposite. The evidentiary problem that concerned the Court in Blue Chip was that a non-purchaser/seller who alleges securities fraud— for example, a plaintiff who alleges that he would have bought 1,000 shares of stock but for the company's misrepresentation—can offer nothing in support of that claim other than his own self-serving testimony as to what he would have done had he known the truth. This is a far cry from Defendants' argument, say the Assignee Plaintiffs, which is merely that the case will require the involvement of non-parties.

Plaintiffs are correct. The concerns raised by Defendants are qualitatively different from the evidentiary concerns articulated in Blue Chip and Smith. At issue in Blue Chip was whether "would-be investors" (i.e., plaintiffs who claim that a misrepresentation caused them to refrain from purchasing the company's stock) have standing to assert a 10b-5 claim.22 Based in large part on specified evidentiary concerns, the Supreme Court denied standing to this class of potential plaintiffs, and limited 10b-5 standing to actual sellers and buyers of securities. The Court succinctly summarized its Blue Chip rationale in a subsequent decision:

In other words, the Court was reluctant to allow claims that would turn almost entirely on a plaintiff's account of his own subjective decision-making process. Such claims would raise substantial evidentiary concerns, turning "on hazy issues inviting self-serving testimony," and leaving the litigation "with little chance of reasonable resolution by pre-trial process."24

The courts in Smith and Dobyns v. Trauter,25 using Blue Chip as a "guidepost,"26 expressed similar evidentiary concerns. In Smith, for example, the court noted that the assignee-plaintiff, a former officer of the company, would face "potentially insuperable evidentiary obstacles in proving the merits of his case."27 The two majority shareholders of the company "unequivocally denied [the assignee-plaintiff's] allegations," meaning that the assignee-plaintiff would have had to "rely heavily on his own `self-serving testimony'" and "the action [would] bear[] `little chance of reasonable resolution by pre-trial process.'"28 Similarly, in Dobyns, the court held that the assignee-plaintiff was likely to offer "self-serving testimony" regarding "the general operation of the corporation and shareholder communication."29

But the assignments at issue here do not implicate the type of evidentiary concerns raised in Blue Chip, Smith, or Dobyns. To the contrary, the Assignments are far more similar to those in Farey-Jones v. Buckingham, a case in which the assignee-plaintiff was allowed to bring a 10b-5 claim.30 Unlike in Smith and Dobyns, the assignment in Farey-Jones involved "a strong connection" between the assignor and assignee; the assignor was a limited partnership that expressly assigned its 10b-5 claim to the partnership's only remaining partner.31 The court noted that, even if the limited partnership (the assignor) had brought the securities claim, the lone partner (the assignee) would have been the person to testify on the partnership's behalf.32 In other words, the same person would have testified regardless of whether the assignor or assignee brought the claim.33

Here, a similarly "strong connection" exists between the purchasers and Assignee Plaintiffs—one that obviates the risk of self-serving testimony that concerned the Blue Chip and Smith courts. Each of the Assignee Plaintiffs is a limited liability company that was formed in April of 2015, roughly five years after the conduct at issue. As a result, it is unclear how the Assignee Plaintiffs could offer any self-serving testimony relevant to the alleged misrepresentations or the Purchasers' reliance thereon. Indeed, given their lack of proximity to the alleged conduct, unlike in Smith and Dobyns,34 it seems unlikely that the Assignee Plaintiffs could offer any relevant testimony at all. And even if one of the Assignee Plaintiffs was deposed through Rule 30(b)(6), the company's Class B Members—each of whom is a purchaser of the BP ADS at issue here—would presumably be the individuals designated to testify on behalf of the companies. Thus, as in Farey-Jones, the assignor-Purchasers would testify regardless of who brought this lawsuit. The Court therefore holds that the prohibitive evidentiary concerns expressed in Blue Chip and Smith are not present here,35 and those cases do not provide this Court with a basis for dismissing the Assignee Plaintiffs' claims.

B. Procedural Problems Arising from the Assignments

Although the Assignments do not give rise to the type of prohibitive evidentiary concerns raised in Blue Chip and Smith, the Assignments nevertheless raise several problematic procedural issues. Defendants argue 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.36 For example:

The Assignee Plaintiffs respond by citing the Supreme Court's decision in Sprint Communications v. APCC Services. In Sprint, payphone operators assigned approximately 1,400 "dial-around" claims to billing and collection companies called "aggregators," and the aggregators then brought suit on the payphone operators' behalves.38 The defendants moved to dismiss under 12(b)(1) based in part on the "various practical problems that could arise because the aggregators, rather than the payphone operators, [were] suing."39 The Supreme Court rejected the defendants' argument, reasoning that Courts have "long permitted assignee lawsuits notwithstanding [these problems]," and district courts have certain tools at their disposal to address such problems as they arise.40

The Assignee Plaintiffs' point is well taken; clearly, despite the practical inconveniences that result, there is a long-standing rule allowing the assignment of legal claims. But it is equally clear that this general rule is not without exception.41 Even Sprint acknowledges as much, noting that "additional prudential questions might perhaps arise" if an assignment was "made in bad faith" or made for purposes other than "ordinary business purposes."42 In other words, sham assignments raise a host of potentially problematic issues and are not necessarily protected by the general rule of assignability.

Sprint's caveat is well-founded. 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,43 conventional discovery protocols,44 certain evidentiary rules,45 and other obligations that are incumbent upon parties to litigation.46 This type of chicanery would be detrimental to the legal process, and the Court sees no reason to permit the type of assignments that could facilitate it.47

While this proposition is relatively straightforward—allowing claimants to skirt important rules of evidence and procedure is, of course, less than ideal—determining whether an assignment was made for ordinary business purposes is more complicated. Indeed, not all assignments made in anticipation of litigation are improper. The payphone operators in Sprint assigned their claims to the aggregators under those circumstances, yet the Court took no issue with the payphone operators' assignments. To the contrary, it concluded that the assignments were not made in bad faith, but rather for "ordinary business purposes."48 Several of the circumstances driving the assignment in Sprint, however, stand in stark contrast to those at issue here.

First, the payphone operators in Sprint had a strong business case for assigning their claims to the aggregators: "because litigation is expensive, because the evidentiary demands of a single suit are often great, and because the resulting monetary recovery is often small," the payphone operators needed to assign their claims to aggregators who could then leverage economies of scale.49 There is even some suggestion in Sprint that pursuing dial-around claims was otherwise cost prohibitive for many payphone operators.50 The existence of this strong business-related justification for the assignments suggests that they were made for "ordinary business purposes," not as a sham.51

Here, as Defendants correctly argue,52 the claimants have struggled to articulate a business-related justification for assigning their claims to newly-formed shell companies. As an initial matter, unlike in Sprint, the Purchasers admit that they made the Assignments for the sake of expediency, not out of necessity. And the expediencies proffered here seem marginal, at best. BPLR explains that the Purchasers, each of whom is a Huff entity or an individual that invested in a Huff entity, "wanted to put all of their claims together with a single manager, which is itself a Huff entity, . . . so that they are spared [from] having to deal with the day-to-day problems [of litigation]."53 For example, the managers of the Assignee Plaintiffs are "charged with interacting with [counsel], facilitating discovery, et cetera, et cetera."54

This business case is unpersuasive. The day-to-day burden of litigation is relatively minimal for plaintiffs, particularly in the context of securities litigation. More importantly, the Court struggles to understand how the Assignments alleviate the purported burden. For example, while "facilitating discovery" is certainly a legitimate goal, interjecting a middleman (the Assignee Plaintiffs) into the discovery process would do little to effect it. The burden of locating relevant documents will still fall on the Purchasers, as the relevant documents are in their possession.55

If anything, the Assignments have made this litigation substantially more complicated, creating more work for all involved. There is little (if any) precedent for a claimant bringing suit through a newly-formed shell company.56 The Purchasers' election to do so here has, predictably, provided Defendants with fertile grounds on which to move for dismissal. 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. The Court cannot conceive of any legitimate, material benefit unique to suing through a litigation vehicle, nor have the Assignee Plaintiffs provided one.57

Second, the claims in Sprint were assigned to independently-owned and-operated entities in arm's length transactions.58 Here, the opposite is true: the Purchasers assigned their claims to entities that they own, operate,59 and formed for the sole purpose of this litigation. Such assignments between affiliates have long been viewed with suspicion,60 and this consideration weighs in favor of concluding that the Assignments were not made for ordinary business purposes.

Finally, although Sprint does not directly address the issue, the factual context of the case indicates that the aggregators were adequately-capitalized going concerns. Here, the assignee-plaintiffs are litigation vehicles with no material assets. As discussed above, this could be problematic if the Court tries to impose sanctions on the Assignee Plaintiffs, and is another point of contrast with Sprint that counsels in favor of departing from the Supreme Court's holding.

Several factors indicate that the Purchasers' assignments were not made for "ordinary business purposes." As the Supreme Court noted, such assignments raise "additional prudential questions," and here, those questions must be answered in Defendants' favor. Allowing the Purchasers (and claimants generally) to bring claims through newly-formed, affiliated shell companies allows them to avoid several of the carefully crafted rules of federal procedure and evidence. While this may not have been the subjective intent of the Purchasers here,61 the objective characteristics of their litigation structuring are inescapable. The Court therefore holds the Assignments inoperable for the purposes of this litigation, and dismisses the Assignee Plaintiffs' Complaints for lack of standing.

IV. 10B-5 CLAIMS AGAINST BP E&P

Plaintiffs claim that BP Exploration & Production Inc. ("BP E&P") made numerous misrepresentations through four of its corporate representatives—Suttles, Hayward, Dudley, and McKay (the "Corporate Executives")—in violation of Section 10(b) and Rule 10b-5. Defendants move to dismiss this claim on the grounds that Plaintiffs have failed to plead that any of these individuals were employed by BP E&P, and, therefore, as a matter of law, none of their alleged misrepresentations can be imputed to BP E&P.

The parties agree that misrepresentations made by employees may be imputed to the employer.62 Thus, the first inquiry for the Court is whether the Corporate Executives were employees of BP E&P. Plaintiffs concede that Hayward, Dudley, and McKay were not employees of BP E&P,63 but Plaintiffs argue that they have adequately alleged that Suttles was an executive officer of the company: "In October 2007, Suttles was named Chief Operating Officer for BP's Exploration and Production business."64 Defendants respond that this allegation is inadequate. It merely provides that Suttles was the COO of "BP's Exploration and Production business," not the separate corporate entity called BP Exploration & Production Inc.

The Court agrees with Defendants; Plaintiffs' allegation is deficient. In their Complaints, Plaintiffs specifically define "BP E&P" to mean "BP Exploration & Production Inc.," yet refer to Suttles as the COO of "BP's Exploration and Production business." This inconsistency creates ambiguity that renders Plaintiffs' allegation inadequate.

Given that Plaintiffs have failed to allege that any employees of BP E&P made any actionable misrepresentations, the question becomes whether the alleged misrepresentations of the Corporate Executives may be imputed to BP E&P. Plaintiffs argue that, "because the Corporate [Executives] were executive officers of BP [or one of its affiliates] whose actions were intended to benefit BP [or one of its affiliates], their misrepresentations are deemed to have been made by the corporate entities responsible for the conduct to which their misstatements relate, i.e., BP plc, BP America, and BP E&P."65 Defendants respond that Plaintiffs have cited to no case law that supports this proposition. To the contrary, say Defendants, case law essentially rejects Plaintiffs' position.

Defendants are again correct. Plaintiffs cite only to this Court's decision in In re BP p.l.c. Sec. Litig., 843 F.Supp.2d 712 (S.D. Tex. 2012). But there, quoting the Fifth Circuit's decision in Southland, the Court held only that the misrepresentations "`appear from the face of the Complaint to have been made [by the Individual Defendants] pursuant to their positions of authority within the company.'"66 Neither BP nor Southland makes any reference to imputing a non-employee's statements to a corporate defendant. Just the opposite, both cases affirmatively indicate that only statements made by persons from "within the company" are imputable. Indeed, in Southland, the court expressly noted that all of the individual defendants were executive officers of the only corporate defendant in the case.67

V. SECTION 20(a) CLAIMS AGAINST BP E&P AND SUTTLES

Plaintiffs additionally bring claims against each of BP E&P and Suttles under Section 20(a) of the Exchange Act. To state a claim under Section 20(a), a plaintiff must first allege facts showing: (i) "an underlying securities fraud violation [by the controlled person]"; (ii) that the "controlling person had actual power over the controlled person"; and (iii) that the "controlling person . . . induced or participated in the alleged violation."68 Defendants' motion to dismiss focuses on the first two elements.69

A. Section 20(a) Claim against BP E&P

Defendants argue that Plaintiffs' Section 20(a) claim against BP E&P should be dismissed because Plaintiffs have failed to adequately allege that BP E&P "had actual power over [Suttles]." Plaintiffs respond by arguing that they alleged Suttles was the COO of BP E&P. Thus, because Suttles was an employee of BP E&P, he was under the company's control.70

Plaintiffs' entire argument is premised on the notion that Suttles was alleged to be the COO of BP E&P. But that premise is incorrect. As discussed in Section IV above, Plaintiffs alleged only that Suttles was the COO of the "Exploration and Production business," not the COO of BP E&P. Consequently, Plaintiffs' only theory of BP E&P's "actual power over" Suttles is flawed, and their Section 20(a) claim cannot stand.

B. Section 20(a) Claim against Suttles

Plaintiffs similarly bring a Section 20(a) claim against Suttles, alleging that Suttles controlled BP E&P, and is therefore liable as a "control person" for the Company's violations of Section 10(b).71 Defendants argue that Plaintiffs have failed to adequately plead two elements of their Section 20(a) claims: (i) that BP E&P committed an "underlying securities fraud violation," and (ii) that Suttles had actual power over BP E&P.

As to the first element, Defendants are correct. Section 20(a) is a secondary liability provision, and plaintiffs must therefore establish a primary violation under section 10(b) before liability arises under section 20(a).72 As discussed in Section III above, Plaintiffs have failed to state an underlying claim against BP E&P. Consequently, their Section 20(a) claim is not viable.

VI. CONCLUSION

After considering the parties' filings, all responses and replies thereto, the oral arguments of the parties, and the applicable law, the Court holds that Defendants' motion to dismiss should be GRANTED in its entirety. As a result:

The Court grants Plaintiffs 15 days to replead.

IT IS SO ORDERED.