Key Takeaways:
- Compliance with the Corporate Transparency Act (the "CTA") is stayed throughout the entire United States as of December 3, 2024.
- The U.S. Federal District Court for the Eastern District of Texas issued a preliminary injunction finding the CTA to likely be unconstitutional and prohibiting its enforcement.
- The preliminary injunction is applicable nationally, so all reporting companies are no longer obligated to comply with the CTA's January 1, 2025 filing deadline pending further court action.
In a striking decision on December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction in favor of the plaintiffs in Texas Top Cop Shop, Inc. et al. v. Garland. The Texas federal court found that the CTA is likely unconstitutional because it goes beyond Congressional powers under the Commerce Clause or the Necessary and Proper Clause in relation to any enumerated power, concluding that the plaintiffs demonstrated a substantial likelihood of success on the merits of their Tenth Amendment challenge. The Texas federal court did not consider the plaintiffs' additional challenges under the First and Fourth Amendments.
The Texas court's preliminary injunction applies nationally. It specifically enjoins the enforcement of the CTA (31 U.S.C. § 5336) and the Reporting Rule (31 C.F.R. 1010.380) and stays the compliance deadline under § 705 of the Administrative Procedure Act (APA) throughout the U.S. As a result, all reporting companies are no longer required to comply with the CTA's January 1, 2025 beneficial ownership (BOI) reporting deadline pending further orders from the district court or on appeal. You can read the district court's decision here.
The Texas court's preliminary injunction would be subject to review on appeal (which would be heard by the U.S. Court of Appeals for the Fifth Circuit). The Department of Justice ("DOJ") will now have to decide whether to appeal that ruling, and whether to seek any immediate emergency relief from the Fifth Circuit Court of Appeals while the appellate process plays out (which ordinarily could take many months). The impending transition to a new administration and new DOJ leadership in January 2025 will obviously have an impact on those decisions. The U.S. Department of the Treasury's Financial Crimes Enforcement Network ("FinCEN") has yet to comment on the decision.
The Texas federal district court's findings align with those of Nat'l Small Bus. United v. Yellen, a case decided earlier this year by the U.S. District Court for the Northern District of Alabama, which found the CTA unconstitutional (but limited its injunctive relief to the plaintiffs in that case only). The Alabama federal court's decision is now under review by the U.S. Court of Appeals for the 11th Circuit in an appeal expected to be decided this coming spring. In that case, the Department of Justice decided not to seek emergency relief from the narrower injunction ordered there.
Clients and reporting companies should stay alert for further updates from Foley Hoag, as additional developments or rulings may impact their compliance obligations under the CTA. For more information on the CTA, reporting companies can visit Foley Hoag's CTA resource center here, or reach out to one of the contacts listed below.
Paralegal Christopher Piccione also contributed to this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
