MVA White Collar Defense, Investigations, and Regulatory Advice Blog

As discussed in our prior blog post, on December 3, 2024, the U.S. District Court for the Eastern District of Texas (“District Court”) issued an order preliminarily enjoining enforcement of the Corporate Transparency Act and the associated beneficial ownership information reporting rules (the “CTA”) nationwide (the “preliminary injunction”). 

The Financial Crimes Enforcement Network (“FinCEN”) issued an alert on December 6, 2024 confirming that reporting companies had no obligation to comply with the CTA “for as long as [the injunction] remains in effect,” but the U.S. government appealed the order and sought an immediate stay of the preliminary injunction in both the District Court and the Fifth Circuit Court of Appeals (the “Fifth Circuit”).  The District Court rejected that request on December 17, 2024.  The Fifth Circuit has not yet ruled on the government’s motion; it likely will not do so before December 20, 2024, but could do so before the end of the year.  Pending a Fifth Circuit ruling granting the government’s motion to stay, the preliminary injunction remains in place, and reporting companies continue to have no obligation to comply with the CTA.

For more details on these judicial developments, please see below.

District Court Developments

On December 11, 2024, the U.S. government filed a motion requesting an immediate stay of the preliminary injunction pending a decision by the Fifth Circuit and an expedited ruling on its motion.  The government argued that it would be “irreparably harmed” absent an immediate stay pending appeal because, in relevant part: (i) the CTA itself is a “form of irreparable injury,” (ii) the injunction significantly disrupts FinCEN’s implementation of the CTA as the year-end initial filing deadline approaches, and (iii) the injunction created “widespread confusion among the public, including regulated parties.”  On December 16, 2024, the plaintiffs filed a response in opposition to the motion for stay, reiterating that the District Court concluded that the plaintiffs showed a likelihood of success on the merits of their argument that the CTA is unconstitutional, and that the balance of equities favored the plaintiffs’ case.  Following a short reply by the government, the District Court issued an order on December 17, 2024 denying government’s motion to stay.

In its December 17, 2024 ruling, the District Court concluded that the plaintiffs have met their burden of a likelihood of success on the merits and pointed out that it had already rejected many of the arguments raised by the government.  The District Court noted that there appears “no set of circumstances under our written Constitution in which Congress would have the power to enact the CTA” and that the Court “gave Congress its due deference but acted as it must to fulfill its judicial responsibility” in granting the injunction.  As a result, as of December 17, 2024, the District Court’s injunction remains in place pending a ruling on the separate motion before the Fifth Circuit.

Fifth Circuit Developments

In parallel with the government’s filing with the District Court requesting a stay of the preliminary injunction, on December 13, 2024, the government also asked the Fifth Circuit to stay the District Court’s injunction order pending appeal or, in the alternative, to narrow the scope of the nationwide injunction to cover only members of the National Federation of Independent Business (“NFIB”), a plaintiff in the case, rather than all other reporting entities.  The government contended that it was likely to succeed on the merits of its appeal, claiming that the CTA falls within Congress’s enumerated commerce powers because it imposes reporting requirements on corporations engaging in commercial activity and is necessary and proper to carry out the execution of other Congressional powers, including Congress’ tax, foreign-affairs, and foreign-commerce powers.  The government argued that the injunction irreparably harms its interests in fighting financial crime and that the nationwide injunction is overly broad because it improperly extends beyond the plaintiffs in the case.  Finally, the government requested a ruling from the Fifth Circuit “no later than December 27, 2024, to ensure that regulated entities can be made aware of their obligation to comply before January 1, 2025.”  This suggests that FinCEN may still seek to enforce CTA reporting by the original, end of the year filing deadline should the government succeed in its motion to stay or limit the preliminary injunction.

Plaintiffs filed a response to the government’s motion to stay on December 17, 2024, arguing failure to show likelihood of success on the merits.  In the response, plaintiffs contended that Congress’ commerce power does not support the CTA; they argue the CTA regulates a business entity’s status, not its commercial actions.  Plaintiffs further argued that the CTA is not a necessary and proper means to further other Congressional powers, and that there is “no limit to the information … the government could demand citizens report” if the CTA is deemed necessary and proper.  A reply by the government is set to be filed by December 19, 2024, and a ruling on the motion may follow before the end of the year.

Key Takeaways

While the District Court’s injunction remains in place and CTA compliance is still voluntary, reporting entities should keep a close eye out for a ruling by the Fifth Circuit.  If the Fifth Circuit stays the District Court’s order pending appeal, the CTA’s reporting requirements will become enforceable again and the government’s filing with the Fifth Circuit provides an indication that it may insist on reporting compliance by the end-of-the year.  Similarly, if the Fifth Circuit narrows the District Court’s order to cover only the at-issue plaintiffs and members of the NFIB, all reporting entities except for the plaintiffs and NFIB’s members will have to file.  

It is, of course, also possible that the Fifth Circuit, like the District Court, denies the government’s requested stay.  In that case, the nationwide injunction would remain in place, but the government could appeal for relief from the stay to the Supreme Court.

Companies should continue to closely monitor FinCEN’s website for further developments.