On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against the Corporate Transparency Act (CTA) in Top Cop Shop, Inc. v. Garland, No. 4:24-CV-478 (E.D. Texas 2024), resulting in the temporary enjoinment of enforcement of the CTA.
The CTA requires companies created or registered to do business in the United States prior to January 1, 2024 to report information about their beneficial owners (BOI) to the Financial Crimes Enforcement Network (FinCen) by January 1, 2025, unless one of 23 enumerated exemptions applies.
Reaching the same conclusion as the U.S. District Court for the Northern District of Alabama, in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. 2024), the Top Cop Court found that the CTA likely exceeds Congress’s powers under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution.
The 79 page opinion focuses largely on the question of standing and the interpretation of the Commerce Clause of the U.S. Constitution that authorizes Congress to regulate interstate commerce.
The Top Cop Court found that the small business owner plaintiffs had satisfied their burden of demonstrating a substantial likelihood of success on the merits of their claims and that the harm of compliance costs outweighed any potential government interest.
The Top Cop Court stated, “Whether the CTA and the Reporting Rule are absolutely unconstitutional is a question for another day.”
The Court further ruled
Because Plaintiffs have met their burden to show that they will suffer unrecoverable compliance costs absent emergency relief, they have met their burden to show that the CTA and the Reporting Rule threatens substantial, imminent, non-speculative, and irreparable harm.
In National Small Business United, the Court entered a final declaratory judgment, concluding that the CTA exceeds the Constitution’s limits on Congress’s power and enjoining the Department of the Treasury and FinCEN from enforcing the CTA against the specific plaintiffs. The Department of Justice has filed an appeal of the National small Business Decision.
The ruling in Top Cop Shop, Inc. v. Garland has broader implications as it has resulted in a nationwide stay of the CTA pending adjudication of its constitutionality and provided a temporary reprieve to companies that would otherwise be required to file a BOI report by January 1st.
Advocates for the CTA claim assert it is a valid tool to combat money laundering and enhance corporate transparency. Opponents of the CTA complaint the it infringes on privacy rights and imposes unfair burdens on small businesses.
Companies otherwise subject to the CTA should monitor the proceedings so that they are prepared to comply should the injunction be lifted.
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