Citing constitutional concerns, U.S. District Judge Amos Mazzant
of the Eastern District of Texas in Sherman ordered a temporary
injunction halting certain financial reporting requirements of the
Corporate Transparency Act.
He granted the motion for preliminary injunction sought by the
National Federation for Independent Businesses and numerous other
small business plaintiffs.
Mazzant concluded that the CTA, as well as the U.S. Department of
the Treasury's rule to implement it, are "likely
unconstitutional as outside of Congress's power."
Matt Bisanz, a Mayer Brown partner in the firm's financial
services practice who formerly worked at the U.S. Securities and
Exchange Commission, said, "This is great news for the more
than 32 million American businesses who were facing a year-end
deadline to disclose their private information to the
government."
Bisanz said that the Financial Crimes Enforcement Network is likely
to consider an emergency appeal. "Hopefully FinCEN gets the
message from the court's decision and does not try to impose an
inequitable burden on new companies," he said.
Ian Gary, executive director of The FACT Coalition, a nonpartisan
alliance of more than 100 state, national, and international
organizations that promotes policies to combat the harmful impacts
of illicit finance on communities, said, "This wrongheaded
injunction is a Christmas gift to criminals who use anonymous shell
companies to traffic fentanyl, exploit people, and hide dirty
money."
"The law is clearly constitutional and Congress was well
within its powers to pass the law to defend America and protect our
financial borders. Two other federal courts have reached the
opposite conclusion and denied injunctions in similar cases, so we
expect the government to move to stay this outlier order
promptly," Gary said.
In Mazzant's 79-page opinion and order he
states that the CTA regulates companies that are registered to do
business under a state's laws and requires those companies to
report their ownership, including detailed, personal information
about their owners, to the federal government or face severe
penalties.
"Though seemingly benign, this federal mandate marks a drastic
two-fold departure from history. First, it represents a federal
attempt to monitor companies created under state law—a matter
our federalist system has left almost exclusively to the several
States," Mazzant said. "Second, the CTA ends a feature of
corporate formation as designed by various states—anonymity.
For good reason, Plaintiffs fear this flanking, quasi-Orwellian
statute and its implications on our dual system of
government.
"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," Mazzant added.
Erin Bryan, a Dorsey & Whitney partner and co-chair of its
consumer financial services group, said, "While many are
rightfully greeting this ruling with enthusiasm, this is not the
end of the CTA or even the end of the beneficial ownership
reporting requirements."
Other federal courts have considered the constitutionality of the
beneficial ownership reporting requirements and reached mixed
results, so the case could be headed for a showdown at the U.S.
Supreme Court, Bryan said.
"Although the Texas ruling is a definite win for the industry,
in some ways the court's ruling also adds more confusion to the
already murky CTA landscape. One aspect that this ruling does not
address is whether newly formed entities are covered by the
injunction, or if it only applies to companies that were in
existence on Jan. 1, 2024. That may have been an intentional
limitation by the court, or an oversight, but either way, it leaves
uncertainty for the industry," Bryan said.
The plaintiffs' challenge to the law was prepared by Caleb
Kruckenberg and Christian Clase of the Center for Individual Rights
in Washington, D.C. Local counsel is John Clay Sullivan of SL Law
in Cedar Hill.
Originally published by Law.com
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