by Matthew Bisanz, Brad A. Resnikoff, and Kelly F. Truesdale

On December 3, 2024, the US District Court for the Eastern District of Texas entered a preliminary injunction suspending enforcement of the Corporate Transparency Act (CTA) and its implementing regulations nationwide, concluding that the CTA is likely unconstitutional as it is outside Congress’s power.[1] Although not the first court to reach such a conclusion, the breadth of the relief provided by the court—applying nationwide, rather than to the specific plaintiffs—reflects a significant development, given the rapidly approaching compliance deadlines for many existing companies under the CTA.

The Texas court’s decision has immediate implications for the 32 million reporting companies facing a year-end deadline to report beneficial ownership information to the government, particularly as reporting in early December indicated that only about 30% of the estimated total filings had been received.[2] While the Texas court’s decision effectively suspends the compliance deadline—as the Financial Crimes Enforcement Network (FinCEN) has confirmed—during the pendency of the injunction, the Government has already appealed the decision to the Fifth Circuit and is currently seeking to stay the effect of the preliminary injunction.

Background

Enacted in 2021 as part of the National Defense Authorization Act, the CTA requires reporting companies to register with the FinCEN and to disclose their ultimate, natural-person beneficial owners.[3] The CTA was enacted to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.”[4] FinCEN’s final rule implementing the CTA became effective on January 1, 2024.[5] Compliance was phased in during 2024, with reporting companies formed or registered prior to January 1, 2024 being required to file their initial report no later than January 1, 2025.

Since its enactment, the CTA has been the subject of litigation challenging its constitutionality under various theories. On March 1, 2024, the US District Court for the Northern District of Alabama, in NSBU v. Yellen, entered a final declaratory judgment finding the CTA unconstitutional, as exceeding constitutional limits on Congress’s power, and permanently enjoined enforcement of the CTA against the plaintiffs in the case—an individual, a small business trade association and its members.[6] We discussed the NSBU decision in detail in our March Legal Update. The case is currently on appeal in the Eleventh Circuit.

Two other district courts that have evaluated the constitutionality of the CTA following the decision in NSBU—in Oregon and the Eastern District of Virginia—had determined that the plaintiffs in those cases failed to demonstrate a likelihood of success on the merits of the case (i.e., to demonstrate that the CTA was likely unconstitutional) so as to warrant a preliminary injunction.[7] These cases have been appealed to the Ninth Circuit and Fourth Circuit, respectively. A district court in Massachusetts recently dismissed a challenge to the CTA following the parties’ agreement that it did not apply to certain condo associations.[8]

The Preliminary Injunction

In the Texas litigation, six plaintiffs—one individual and five entities, consisting of three commercial businesses, a political organization, and a national trade association composed of approximately 300,000 members—filed a lawsuit seeking a declaratory judgment that the CTA is unconstitutional, and an injunction against its enforcement.[9] On June 3, 2024, the Plaintiffs moved for a preliminary injunction, and on December 3, the district court granted the Plaintiffs’ motion and entered a preliminary injunction.

The Plaintiffs challenged the CTA on several constitutional grounds, making facial and as-applied challenges based on the First, Fourth, Ninth and Tenth Amendments. The Plaintiffs further argued that FinCEN’s regulations implementing the CTA are unconstitutional and should be set aside pursuant to the Administrative Procedure Act (APA).[10] After determining that each of the six plaintiffs had standing (and that the trade association had associational standing to sue on behalf of its members), the court turned to the Plaintiffs’ burden in seeking a preliminary injunction. The court determined that (i) the Plaintiffs are threatened with irreparable harm by the CTA; (ii) the Plaintiffs are substantially likely to succeed on the merits; and (iii) the balance of equities favored issuance of an injunction. With respect to the Plaintiffs’ likelihood of success on the merits, the court evaluated the Defendants’ arguments that the CTA is constitutional under the Commerce Clause and the Necessary and Proper Clause, in the latter case coupled with Congress’s enumerated powers to regulate commerce, regulate foreign affairs, and to lay and collect taxes. The court concluded that neither avenue justified Congress’s enactment of the CTA, and that the Plaintiffs had thus met their burden to show substantial likelihood of success on the merits of their Tenth Amendment challenge.[11] Having determined that the Plaintiffs demonstrated a substantial likelihood of success on the merits of their facial challenge to the CTA’s constitutionality, the court declined to assess the Plaintiffs as-applied challenges or their other challenges under the First Amendment or Fourth Amendment.[12]

After determining that the Plaintiffs had met their burden and that a preliminary injunction was warranted, the court turned to the scope of the injunction. Although the Plaintiffs had only requested that the injunction cover the Plaintiffs, including the trade association’s approximately 300,000 members, the Defendants had argued such a broad scope would “in practical effect” be a nationwide injunction. The court took the Defendants’ point and determined that the injunction should apply nationwide—not limited to the Plaintiffs and trade association’s membership.[13] Under the court’s preliminary injunction, neither the CTA nor its implementing regulations may be enforced, and “reporting companies need not comply with the CTA’s January 1, 2025, [beneficial ownership information] reporting deadline pending further order of the Court.”[14]

The Government’s Response

On December 5, the US Department of Justice (DOJ), on behalf of FinCEN, filed a notice of appeal of the injunction to the US Court of Appeals for the Fifth Circuit.

On December 7, FinCEN released a statement on its website confirming that reporting companies—i.e., companies that would be required to report their beneficial ownership information to FinCEN under the CTA and its implementing regulations—are not required to file beneficial ownership reports for as long as the nationwide injunction of the CTA remains in effect.[15] Further, FinCEN noted that reporting companies will have no liability for failing to file required beneficial ownership reports during the pendency of the injunction. FinCEN will continue to accept beneficial ownership reports from reporting companies on a voluntary basis.

FinCEN’s statement appears to resolve some uncertainty as to the application of the Texas court’s order. While the order enjoined enforcement of the CTA and its implementing regulations in their entirety and stayed the compliance deadline, the order only expressly addressed the January 1, 2025 compliance deadline, which applied to reporting companies formed or registered prior to January 1, 2024. For reporting companies formed on or after January 1, 2024, the applicable compliance deadline under the CTA’s implementing regulations is either 90 or 30 days following the formation or registration of the reporting company, depending on whether the reporting company is established in 2024 or 2025. Since the order did not expressly address these compliance deadlines, reporting companies formed or registered beginning in 2024 were left to consider whether they were at risk of a penalty for having failed to comply during the duration of the injunction. In its statement, FinCEN appears to interpret the court’s order as specifically “stay[ing] all deadlines to comply with the CTA’s reporting requirements,” and thus FinCEN’s statement is broadly applicable to all reporting companies.

In addition to its appeal of the preliminary injunction, DOJ has filed a motion to stay the injunction pending appeal which, if granted, would have the effect of reinstating the compliance deadline. That motion is currently pending.

Takeaways

The Texas court’s decision in many ways resembles that of the Northern District of Alabama in NSBU v. Yellen, discussed above. However, unlike the NSBU decision, which granted an injunction limited to the plaintiffs in the case, the court in Texas entered a nationwide injunction prohibiting enforcement of the CTA and its implementing regulations against any reporting company, regardless of when it was established.

Unlike the NSBU decision, the Texas decision is a preliminary injunction and the court has not made a final determination that the CTA is unconstitutional—only that it is likely unconstitutional for purposes of evaluating the preliminary injunction. While the preliminary injunction suspends enforcement of the CTA and implementing regulations nationwide, reporting companies should continue to monitor developments in this and other cases addressing the constitutionality of the CTA. The Texas decision is unlikely to be the last word on the constitutionality of the CTA, and the government has, as it did following the NSBU decision, appealed the decision. Thus, further action by the court, the Fifth Circuit or potentially the Supreme Court could affect the status of the preliminary injunction and reporting companies’ obligations under the CTA.

Given FinCEN’s ongoing appeal, and efforts to stay the preliminary injunction pending that appeal, reporting companies should be especially vigilant as further action by either the district court or the Fifth Circuit could quickly change the status of the injunction and, without further relief from FinCEN, potentially result in a compressed timeframe for reporting companies to make filings at year-end.

Footnotes

[1] On December 5, 2024, the court issued an Amended Memorandum Opinion and Order making a minor correction to the original order. Texas Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec. 5, 2024).

[2] Greg Iacurci, Treasury Department may fine small businesses $10,000 or more if they don’t file this new report, CNBC (Dec. 9, 2024) (citing FinCEN information provided by office of Rep. French Hill).

[3] 31 U.S.C. § 5336.

[4] 87 Fed. Reg. 59498 (Sept. 30, 2022).

[5] 88 Fed. Reg. 83499 (Nov. 30, 2023).

[6] Nat’l Small Bus. United v. Yellen, No. 5:22-CV-01448, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024).

[7] See Firestone v. Yellen, No. 3:24-CV-1034, 2024 WL 4250192 (D. Or. Sept. 20, 2024); Community Associations Inst. v. Yellen, No. 1:24-CV-1597, 2024 WL 4571412 (E.D. Va. Oct. 24, 2024).

[8] Lewis Wharf Condo. Trust vs. Yellen, No. 1:24-CV-11679 (D. Mass. Nov. 22, 2024).

[9] Texas Top Cop Shop, Inc., et al v. Garland et al, No. 4:24-cv-00478 (E.D. Tex. Dec. 3, 2024).

[10] Id. at 14.

[11] The court mentions multiple times that neither party could explain what Congress intended when it stated that the CTA was necessary to bring the United States into compliance with international anti-money laundering and countering financing of terrorism standards. This is somewhat surprising because FinCEN noted in the preamble to the implementing regulation that the international standards in question were issued by the Financial Action Task Force. The reluctance to address the topic in court may reflect recent concerns with US regulator participation in certain non-treaty organizations. See House Hearing on Transparency in Global Governance (Sept. 11, 2024), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=409348.

[12] Id. at 73.

[13] See id. at 77.

[14] Id. at 79.

[15] See Beneficial Ownership Information, FinCEN, https://fincen.gov/boi (last accessed Dec. 8, 2024).

Matthew Bisanz and Brad A. Resnikoff are Partners and Kelly F. Truesdale is an Associate at Mayer Brown. This post first appeared on the firm’s blog. 

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