A Texas-sized injunction for the Corporate Transparency Act

In an interesting legal development, on December 3, 2024, a federal judge in the US District Court for the Eastern District of Texas recently issued a nationwide preliminary injunction blocking the implementation of a crucial provision of the Corporate Transparency Act (CTA). This decision has drawn widespread attention and raised many questions regarding the future of the CTA.

The CTA is a US law that mandates certain businesses to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), aiming to combat money laundering and other illicit activities by increasing transparency around business ownership structure. Companies are gearing up for compliance prior to the January 1, 2025 deadline. See our overview of the reporting requirements and common pitfalls under the CTA, “New year, new reporting requirements.”

The lawsuit was brought forward by six plaintiffs in May 2024. The plaintiffs claim that Congress exceeded its Constitutional authority when it passed the CTA. The court’s order in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, Attorney General of the United States, et al., No. 4:24-CV-478 (i) enjoined enforcement of the CTA on a preliminary basis and (ii) stayed the January 1, 2025 compliance deadline for entities formed prior to January 1, 2024 to make the requisite Beneficial Ownership Information reports. This is a nationwide preliminary injunction, subject to a final ruling on the merits and/or the results of the appeal.

The court highlighted the likely Congressional overreach of the CTA under the Constitution and explicitly rejected the arguments that Congress has this authority under the Commerce Clause and the Necessary and Proper Clause. Further, the court found that regulation of corporate formation matters is a power granted to the states pursuant to the Tenth Amendment, and the disclosures required under the CTA violate rights under the First and Fourth Amendments. The court did not determine the Constitutionality of the CTA, which may be addressed in future proceedings.

The federal government filed an appeal to challenge the injunction on December 5, 2024 in the US Court of Appeals for the Fifth Circuit. However, challenging this ruling may not be a priority for the incoming federal executive administration, so the long-term viability and enforcement may remain uncertain for the foreseeable future.  

This is not the first time that the CTA has come under judicial scrutiny. However, this injunction is broader in scope than the limited injunction ordered in the National Small Business United v. Yellen case out of the US District Court for the Northern District of Alabama, which was limited to the plaintiffs in that case. The appeals for that case remain ongoing in the US Court of Appeals for the Eleventh Circuit, with oral arguments having taken place on September 27, 2024.

In the midst of the judicial intervention, FinCEN is still accepting Beneficial Ownership Information reports. Further, the FinCEN website now contains a notice that reporting companies are not currently required to file a beneficial ownership report and are not subject to liability if they fail to do so while the applicable order remains in force. Reporting companies may still opt to file the beneficial ownership reports. We would encourage our clients to continue to take the requisite steps to ensure compliance in the event that the government succeeds in appealing the ruling or the court otherwise lifts the injunction. If the appeal is successful and reporting companies fail to meet the January 1, 2025 deadline, they could face significant penalties for noncompliance.