Eleventh Circuit Scrutinizes Claims That The CTA Is Unconstitutional

The U.S. Court of Appeals for the Eleventh Circuit heard oral arguments on Friday September 27, on the appeal of a decision from a federal district court in Alabama finding the Corporate Transparency Act's ("CTA") beneficial owner reporting requirements unconstitutional because the requirements exceeded Congress' authority under the commerce clause. In short, businesses should not expect a decision in this case to impact the looming deadline to comply with the CTA.

The CTA, which came into effect on January 1, 2024, requires certain companies to report beneficial ownership information to the Treasury Department's Financial Crimes Enforcement Network ("FinCEN"). The deadline for companies that existed on January 1, 2024, to report beneficial ownership information to FinCEN is January 1, 2025.

See Honigman's previous coverage, available here, for background on the CTA.

In November 2022, National Small Business United, doing business as the National Small Business Association ("NSBA"), sued the Department of Treasury in federal court in Alabama (National Small Business United v. Yellen) arguing that the CTA is unconstitutional on several grounds, including that Congress lacks authority to enact such a law. The court agreed, issuing an opinion in March 2024 finding the CTA unconstitutional. This was the decision on which the Eleventh Circuit heard arguments.

See Honigman's previous coverage, available here, for background on the lower court decision.

During oral arguments, the Treasury defended the CTA's beneficial owner reporting requirements, asserting they fall well within Congress' constitutional authority to regulate commerce. The Treasury also contended that NSBA failed to prove that the CTA has no constitutional application, as required to invalidate the law. NSBA argued that the CTA oversteps Congress' authority under the Commerce Clause, by regulating entity formation, a non-economic act. NSBA also argued that the CTA constituted an unreasonable search in violation of the Fourth Amendment.

The panel of judges expressed skepticism of NSBA's Fourth Amendment arguments. But based on their questions during oral arguments, these judges seemed likely to send the case back to the Alabama court to determine whether there is a constitutional application of the CTA.

A federal court in Oregon recently issued a decision in a separate challenge to the constitutionality of the CTA. The Oregon court denied the plaintiffs' request for a preliminary injunction, instead finding that the plaintiffs were unlikely to prevail on their claims that the CTA is unconstitutional.

What does this mean for your business? Given that the Eleventh Circuit is likely to remand the case to the lower court, it appears unlikely that the CTA's beneficial owner reporting requirements for existing companies will be invalidated before the filing deadline at the end of the year. If you have not already done so, your business should plan on reporting beneficial owner information to FinCEN if none of the CTA's reporting exemptions apply.

What comes next? Honigman anticipates that the case will be remanded and the litigation will continue in the Alabama court. The Honigman CTA Task Force will closely monitor this litigation, and other potential CTA litigation, for its impact on the firm's clients.

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