Rough Waters Ahead: Corporate Transparency Act Blocked Nationwide by Federal District Court, by Seth Meyer, Esq. and Alisha Talati, Esq.,12-5-2024

Update: On December 5, 2024, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit regarding the recent court order that placed a nationwide injunction on the Corporate Transparency Act (CTA) and then on Dec. 11 filed a motion with the district court requesting a stay of the preliminary injunction pending a decision from the Fifth Circuit on their appeal. On December 16, the plaintiff filed its opposition to the request for a stay of the preliminary injunction. On December 17, the U.S. Department of Justice filed its reply, but ultimately the district court declined to issue a stay and therefore the December 3, 2024 ruling remains in effect. On December 13, the DOJ also filed a motion in the Fifth Circuit asking that the court stay the district court’s order pending appeal or alternatively narrow the injunction to members of the plaintiff and requested a ruling from the Fifth Circuit by no later than December 27, 2024. The parties have fully briefed the motion and are awaiting further direction from the Court. In the meantime, FinCEN has issued  an alert noting that given the recent court order, “reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction blocking the U.S. Department of Treasury from enforcing the Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting requirements or imposing penalties for non-compliance.

In Texas Top Cop Shop, Inc. v. Garland et al., Judge Amos L. Mazzant III ruled that the “CTA appears likely unconstitutional” and accordingly, “the CTA and its implementing regulations must be enjoined.”

Mazzant finds that the CTA is a “two-fold departure from history” as it first “attempt[s] to monitor companies created under state law” and it second “ends a feature of corporate formation as designed by various states-anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implication on our dual system of government.” In other words, Judge Mazzant fears that the CTA disturbs the balance of our federalist system.

Thus, he further ruled that, “despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power.” The ruling comes less than a month before the CTA’s January 1, 2025 reporting deadline of beneficial ownership information of corporate entities registered to do business before January 1, 2024 to a federal database maintained by the Financial Crimes Enforcement Network (FinCEN) as part of an anti-money laundering effort. Judge Mazzant’s decision also pauses the 90-day registration requirements for corporate entities formed after January 1, 2024 and will likely pause the 30-day registration requirement for entities formed after January 1, 2025.

According to FinCEN, The CTA’s filing requirement was estimated to “have a significant economic impact” on existing business entities. In fact, FinCEN estimated approximately 32.6 million existing reporting companies and 5 million new reporting companies formed each year would be impacted. The ruling stems from a lawsuit filed in May 2024 by six plaintiffs who sought a preliminary injunction on behalf of themselves due to the alleged unconstitutionality of the CTA, including its impact on small business owners and its implications on First Amendment protections. Judge Mazzant ultimately issued a nationwide preliminary injunction.

Lower courts across the country have not agreed on the constitutionality of the CTA.

For instance, on March 1, 2024, in National Small Business United et al. v. Yellen et al., Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama found the CTA unconstitutional and issued an injunction, but only to the named plaintiffs. The court declined to issue a national injunction. In contrast, However, on September 20, 2024, in Firestone v. Yellen, Judge Michael. H. Simon of the U.S. District Court for the District of Oregon sided with the government denying a motion for a preliminary injunction for plaintiffs in that case.

The government will likely appeal Judge Mazzant’s decision, but in the interim, businesses will get a reprieve from the CTA’s reporting requirements.

Kaufman Dolowich continues to monitor developments on this evolving issue. For a more detailed breakdown on the CTA and New York State specific rules, please read KD’s previous blogs on the laws.

Authors: Of Counsel Seth Meyer and Associate Alisha Talati