On December 3, 2024, the U.S. District Court for the Eastern District of Texas (the “Court”) issued a preliminary injunction blocking enforcement of the Corporate Transparency Act (CTA), which requires that certain domestic and foreign entities doing business in the United States disclose certain information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The Court also stayed the impending January 1, 2025, compliance deadline.1 The Court sided with the National Federation of Independent Business (NFIB) and several other plaintiffs who challenged the CTA in a suit filed in May.
The Court’s key holding states:
Having determined that Plaintiffs have carried their burden, the Court GRANTS Plaintiff’s Motion for a Preliminary Injunction. Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.2
Notably, the current ruling is a nationwide injunction, in contrast to the March 2024 ruling issued by the U.S. District Court for the Northern District of Alabama in NSBA v Yellen,3 which enjoined the government from enforcing the CTA against only the specific plaintiffs in that case. As with the National Small Business Association (NSBA) case, NFIB argued that the CTA is unconstitutional on the grounds that it exceeds Congress’s enumerated powers, infringes upon states’ rights, improperly compels speech, and contradicts the right of anonymous association guaranteed by the First Amendment in addition to violating the Fourth Amendment by forcing the disclosure of private information. The Court’s injunction rests on its conclusion that Congress likely lacks power under the Commerce Clause and the Necessary and Proper Clause to adopt the CTA. The Court did not reach the plaintiffs’ arguments under the First and Fourth Amendments.
In light of the Court’s decision, one potential approach for reporting companies would be to postpone making beneficial ownership information report (BOIR) filings for now, pending further action by this or other courts with jurisdiction over the matter. However, reporting companies should take into account that the Court’s ruling is only preliminary at this stage based on the plaintiffs’ successful demonstration that the CTA is “likely unconstitutional” as outside Congress’s power. As a result, the preliminary injunction ruling may not be the final word. For example, the government could choose to appeal the preliminary injunction ruling and, if so, may seek expedited review from the Fifth Circuit and potentially the Supreme Court. Among other things, the government might challenge the nationwide scope of the injunction – such injunctions have drawn increasing scrutiny in recent years.
Reporting companies should also stay tuned for updates or guidance from FinCEN, which may clarify the agency’s intended next steps in light of the Court’s ruling.
You may find a PDF of the full order here.
1 Texas Top Cop Shop, Inc., et al. v. Garland, et al., No. 4:24-cv-478 (E.D. Texas Dec. 3, 2024).
2 See id. at 79.
3 National Small Business United et al. v. Yellen et al., No. 5:22-CV-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024).
Thank you to Knowledge Management Lawyer Katherine E. Gause for her significant contributions to this Sidley Update.
