Editor’s Note: This alert was originally published on Dec. 4, 2024. It has since been updated to reflect: (i) the government’s notice of appeal filed on Dec. 5, 2024, and a related public statement issued on Dec. 6, 2024; and (ii) a legislative effort currently underway to delay CTA compliance to 2026.
Key Takeaways
- On Dec. 3, 2024, a federal district court issued a preliminary injunction, temporarily halting the implementation of the Corporate Transparency Act (CTA).
- The ruling applies to all potential CTA filers, not just the named plaintiffs – meaning that CTA compliance is not required unless and until the preliminary injunction is stayed or overturned on appeal.
- On Dec. 5, 2024, the U.S. government officially appealed the decision, filing a Notice of Appeal to the Fifth Circuit Court of Appeals.
- On Dec. 6, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a public statement to confirm that “reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force” and that reporting companies may continue to voluntarily file.
- In the wake of the uncertainty caused by this ruling, there is a serious legislative effort currently underway to delay any CTA compliance obligations to 2026.
District Court Issues Nationwide Preliminary Injunction
On Dec. 3, 2024, a Texas federal district court in Texas Top Cop Shop, Inc., et al. v. Garland, et al. (E.D. Tex., No. 4:24-cv-00478, 12/3/24) granted the plaintiffs’ motion to preliminarily enjoin the U.S. government from enforcing the CTA and issued a stay of the upcoming Jan. 1, 2025 initial filing deadline. But unlike the Alabama district court decision issued earlier this year, this ruling was not limited to only the named plaintiffs. In this case, the court determined that a nationwide injunction and stay of the compliance deadline were appropriate.
In granting the preliminary injunction, the court held that plaintiffs had established (i) a substantial likelihood of success on the merits of their claims that the CTA is unconstitutional, finding that the CTA was not likely to be justified under either the Commerce Clause or the powers to regulate foreign affairs or collect taxes, in each case as supplemented by the Necessary and Proper Clause; (ii) a substantial threat that they will suffer irreparable harm absent injunctive relief; (iii) that the threatened injury outweighs any damage that the injunction might cause the government; and (iv) that the injunction will not harm the public interest.
Notably, the plaintiffs sought only an injunction that would apply to the plaintiffs before the court, which include, among others, approximately 300,000 members of the National Federation of Independent Business. In response, the government asserted that the practical effect of such an injunction would have a nationwide impact. The court “agreed with the Government’s point,” and therefore held that a “nationwide injunction [was] appropriate in this case.”
The court acknowledged that nationwide relief issued by lower courts is subject to “ongoing debate” and “controversy.” Nevertheless, the court reaffirmed that it had the authority to apply the preliminary injunction nationwide and that doing so was appropriate.
Government Appeals
As expected, the U.S. government appealed the district court order by filing a Notice of Appeal to the Fifth Circuit Court of Appeals on Dec. 5, 2024. However, as of the publication of this alert, the government has not filed any motions to either stay the injunction or expedite the appeal. A motion to stay the injunction would have been expected within a few days after the district court’s decision. While the government could still seek such relief, the longer we do not see such requests on the docket, the more likely it seems that the government will let the appeal play out in the ordinary course, which could take months.
FinCEN Issues Statement
On Dec. 6, 2024, FinCEN issued its public statement on the ruling, confirming that:
- It will comply with the order “for as long as it remains in effect.”
- “[R]eporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect.”
- “[R]eporting companies may continue to voluntarily submit beneficial ownership information reports.”
The statement also confirmed the government’s appeal of the ruling, but it did not give any further indication of: (i) how it plans to pursue that appeal (e.g., whether it will seek an expedited review); or (ii) what type of grace period filers should expect if the injunction is later overturned on appeal.
Potential Statutory Delay to 2026
In the wake of the uncertainty created by the district court’s ruling, there is a serious effort underway by the Senate, with support from House Republicans, particularly those on the Financial Services Committee, to delay the effective date of the CTA’s compliance deadline to 2026. This proposed delay is part of a larger negotiation to include new restrictions on outbound investment controls.
There was some hope that the provisions to enact this delay would get included on this year’s National Defense Authorization Act (NDAA) (i.e., the same annual legislation that originally enacted the CTA). However, that did not occur.
The last opportunity for the any such statutory delay of the CTA’s compliance deadline to become law before the end of this session of Congress is its inclusion in the Continuing Resolution to fund the government. The current Continuing Resolution expires on Dec. 20, 2024.
We will continue to provide updates regarding any further developments as they arise.
[View source.]
