On December 3, 2024, in Texas Top Cop Shop, Inc., et al., v. Garland, et al.,[i] Judge Mazzant issued a Memorandum Opinion and Order that enjoined the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) from enforcing the Corporate Transparency Act (CTA) and its Beneficial Ownership Information Report (BOIR)[ii]requirements nationally. While a contemporaneous case on appeal from Alabama in the Eleventh Circuit Court of Appeals also that held that the CTA is unconstitutional, that ruling only applies to the plaintiffs in that case[iii].
Reasoning
There are other pending cases challenging the constitutionality of the CTA in Maine[iv], Massachusetts[v], Michigan[vi], Ohio[vii], Oregon[viii], and Virginia[ix]. In this case, however, the Court considered the Plaintiffs’ Tenth Amendment arguments, which were not addressed in the Alabama case, allowing the case to proceed. The Plaintiffs argued that the CTA violated the Constitution on several grounds: violating state rights under the Ninth and Tenth Amendments, violating the First Amendment by compelling speech and the infringing on the right of anonymous association, and violating the Fourth Amendment by forcing disclosure of private information.
While the Court did not declare the CTA was unconstitutional, it noted that it “appears likely unconstitutional” because it does not fall within Congress’s enumerated powers under the Commerce Clause or the Necessary and Proper Clause. For the purposes of granting an injunction, the Court did not need to determine the CTA’s constitutionality outright. Instead, the Plaintiffs had to demonstrate that the CTA substantially threatens them with irreparable harm, a substantial likelihood of success on the merits, and that the threatened harm outweighs any damage to the government, and that injunction will not harm the public.
Irreparable Harm
The Plaintiffs argued that complying with the CTA would force them to expend resources, time, and compliance costs and legal expenses, and, while also compelling them to reveal protected information under threat of noncompliance and criminal punishment. The Court agreed, rejecting the government’s assertion that compliance costs would be minimal and “not a heavy lift”.
Substantial Likelihood of Success
Although the Plaintiffs raised multiple constitutional challenges, the Court focused on the Tenth Amendment. Like the Alabama case, the government argued that the CTA was constitutional under the Commerce Clause, but the Court disagreed, holding that the CTA is unconstitutional because it “regulates reporting companies simply because they are registered entities and compels disclosure of information for a law enforcement purpose” and would be a “substantial expansion of commerce power”.
The Court also rejected the government’s reliance on the Necessary and Proper Clause of the Constitution and authority to regulate commerce, foreign affairs, and to lay and collect taxes to justify the CTA. It reasoned that the Clause requires a connection to an enumerated power, which the Court found absent here, stating there was “no constitutional solace” in the government’s arguments. Therefore, the Court concluded the Plaintiffs had a substantial likelihood in proving that the CTA exceeds Congress’s authority, violating the Tenth Amendment.
Balancing of Equities
In the “balancing of equities”, the Court found that the concrete harm to the Plaintiffs outweighed any potential harm to the government. While the government has an interest in ferreting out financial crime, the Court emphasized that “neither [the Government] nor the public has any interest in enforcing a regulation that violates federal law” and that “it is always in the public interest to prevent a violation of a party’s constitutional rights”.
Our Recommendation for CTA Filings
FinCEN has released a statement reaffirming the CTA’s vital role in protecting the U.S. from financial threats such as terrorist financing, drug trafficking, and money laundering, and maintaining its belief that it is constitutional[x]. The government has also successfully defeated injunction requests under similar constitutional challenges in the Oregon and Virginia cases, which are currently on appeal in the Ninth and Fourth Circuits. On December 5, 2024, the government filed a Notice of Appeal to the Fifth Circuit Court of Appeals in the current case. Given the looming January 1, 2025, deadline to file BOIR’s, the government is likely to seek an expedited appeal.
While it is possible that FinCEN could extend the reporting deadline, businesses should be prepared for the possibility that the injunction is overturned before January 1, which may require timely BOIR filings. BOIR’s can still be voluntarily filed during the appeal process. We recommend that businesses collect the necessary information to file BOIR’s closely monitor developments in these cases.
The CTA remains complex and ever-changing. If you need legal advice on how your organization should handle the CTA, contact us.
/
[i] Texas Top Cop Shop, Inc., et al., v. Garland, et al., No. 4:24-cv-00478 (E.D. Tex.)
[ii] https://www.smr-law.com/insights/corporate-transparency-act/
[iii] https://www.smr-law.com/insights/corporate-transparency-act-constitution-challenge-on-appeal/
[iv] William Boyle v. Janet Yellen et al., No. 2:24-CV-00081
[v] Black Economic Council of Massachusetts, Inc. et. al., v. Janet Yellen, et. al., No. 1:24-cv-11411-PBS
[vi] Small Business Association of Michigan, et. al., v. Janet Yellen, et. al., No. 1:24-cv-314
[vii] Robert J. Gargasz Co. LPA, et. al., v. Janet Yellen, et. al., No. 1:23-cv-02468-CEF
[viii] Michael Firestone, et al., v. Janet Yellen, et. al., No. 3:24-cv-1034-SI
[ix] Community Associates Inst. v. Janet Yellen, No. 1:24-CV-1597
[x] https://fincen.gov/boi
