MVA White Collar Defense, Investigations, and Regulatory Advice Blog

Updated December 10, 2024 to reflect the U.S. Government has filed a notice to appeal the lower court's injunction.

On December 3, the U.S. District Court for the Eastern District of Texas (“Court”) entered a sweeping order enjoining enforcement of the Corporate Transparency Act and the associated beneficial ownership information reporting rules (the “CTA”) nationwide. The immediate effect: notwithstanding the CTA’s stated reporting deadline of December 31, 2024, no entity is currently required to file with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) information about itself, its owners or the persons otherwise controlling the entity.

This alert describes the Court’s ruling and highlights key considerations for entities that would, absent the Court decision, have been required to file with FinCEN by year-end.

Background on Texas Top Cop Shop, Inc., et al v. Garland et al. (case 4:24-cv-00478 December 3, 2024)

The six plaintiffs, representing mainly small business owners, initially filed suit on May 28, 2024 and sought a preliminary injunction and a declaratory judgment that the CTA, which generally requires reporting companies to report information to FinCEN about the company and its beneficial owners, is unconstitutional. Plaintiffs argued that the CTA intrudes on States’ rights; compels speech and burdens the right of association; and impermissibly compels disclosure of private information. The Court determined that plaintiffs had demonstrated a substantial likelihood of success on their claims and granted their motion of a preliminary injunction. In issuing the injunction and staying the looming reporting deadline, the Court determined that the CTA likely exceeded Congress’ power under the Commerce Clause, Congress’ Taxing Power and the Necessary and Proper Clause – framing the CTA as a law enforcement tool rather than an instrument intended to protect commerce and stating that a company’s ability to operate anonymously is not economic activity. In addressing each of the U.S. Government’s arguments to the contrary, the Court noted that it “opens each door in turn but shuts them all. The CTA finds no constitutional solace behind any door.” The Court also critiqued the CTA for disrupting the traditional jurisdiction of the States to control corporate regulation and, in a particularly striking part of the opinion, stated that plaintiffs had “good reason” to fear “this flanking, quasi-Orwellian statute and its implications on our dual system of government.” The Court did not specifically opine on plaintiffs’ claims under the First and Fourth Amendments

Notably, the plaintiffs did not request a nationwide injunction and only requested the injunction cover plaintiffs and the members of the National Federation of Independent Business (approximately 300,000 firms). However, the U.S. Government’s response to plaintiffs’ request was that it was effectively a request for a “nationwide injunction”. Cheekily, the Court stated that it “agree[d] with the Government’s point” and found “[a] nationwide injunction … appropriate in this case,” thereby granting much broader relief than originally requested. Such relief is particularly relevant to the 32.6 million domestic and foreign reporting companies existing at the start of 2024 currently grappling with the CTA and the compliance deadline, which is currently less than a month away.

Next Steps

The U.S. Government filed a notice to appeal the Court’s order on December 5, 2024. The appeal will be reviewed by the U.S. Court of Appeals for the Fifth Circuit. In recognition of the Court's order, FinCEN has announced that reporting companies are no longer required to file while the order is effective and would not face liability for failing to do so. Nonetheless, companies may continue to file beneficial owner reports voluntarily. We expect FinCEN will continue to post updates on the website for CTA filings.

Key Takeaways

• Companies subject to the CTA (“Reporting Companies”) and their beneficial owners should continue to monitor FinCEN’s homepage for the beneficial ownership information filings for updates regarding compliance deadlines and enforceability of reporting requirements. Given that FinCEN has announced it will comply with the ruling and that filings are currently optional, we expect that reporting companies would be granted additional time to file if the injunction is struck down. However, the fact that FinCEN did not halt filings entirely makes that a point of conjecture. Monitoring for updates is therefore particularly critical for Reporting Companies (both newly formed and existing prior to 2024) that have not made initial filings that were either due this year or are required by the end of the year.

• Reporting Companies that have already complied with the CTA may also question their obligation to provide updated reports within thirty days of the change of any previously filed information. Such companies should also monitor the FinCEN homepage for any updates on reporting requirements; while the injunction of CTA enforcement also staves off the requirement to update previously filed information, FinCEN has not specifically weighed in on the updating requirements in light of the ruling.

• Unlike the preliminary injunction against the CTA issued in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.), which was limited to the plaintiffs and NFIB members, the injunction in Texas Top Cop Shop, Inc., et al Garland et al. is nationwide. The U.S. Government appealed the injunction in National Small Business United v. Yellen and that appeal is pending before the 11^th Circuit. As a result, there is a potential for a circuit split if the 5^th and 11^th Circuits reach different conclusions, although the practical effect of that split would be moot if the 5^th Circuit upholds the Court’s nationwide injunction.

• Companies subject to the CTA and their beneficial owners should also be wary that the 5^th Circuit could limit application of the at-issue injunction solely to the plaintiffs in that case.  Such a limit would not be without precedent in the Circuit, which has both limited and upheld nationwide injunctions in recent years.  See Louisiana v. Becerra, 20 F.4th 260 (5th Cir. 2021) (limiting the United States District Court for the Western District of Louisiana’s initial grant of a nationwide preliminary injunction regarding a COVID-19 vaccination mandate solely to the 14 plaintiff states that brought the case); see also Texas v. United States, 809 F.3d 134, 188 (5th Cir. 2015) (upholding a nationwide injunction in an immigration case).