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December 31, 2024
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Beneficial owners of reporting companies, as defined under the Corporate Transparency Act (31 U.S.C. § 5336) (the “CTA”), and anyone closely following recent activity surrounding the CTA and its Reporting Rule, are likely aware of ongoing litigation in Texas Top Cop Shop, Inc. et al. v. Garland et al. (“TTCS”). 

On December 3, 2024, the Federal District Court for the Eastern District of Texas (the “Eastern District”) granted a nationwide preliminary injunction against the CTA and its Reporting Rule, and staying the January 1, 2025, deadline for making the required beneficial owner information (“BOI”) filings under the CTA and Reporting Rule. That opinion, and its immediate effects, are detailed here.  The Government requested a stay of the preliminary injunction, however, the Eastern District denied that request, which led the Government to appeal the initial ruling to a higher court. 

Immediate aftermath of TTCS 

Following the initial ruling in TTCS, reporting companies otherwise obligated to file under the CTA effectively had three options:  

1. a reporting company could choose to ignore the injunction and stay of the filing deadline, and proceed with filing;  
2. reporting companies could take a “stand-by” approach to filing by continuing to gather all required information without actually submitting any filing; or  
3. reporting companies could choose to rely on the injunction and stay of the filing deadline, and halt all CTA compliance activities.  

Which of those options would be the most advisable depended on the specific circumstances affecting each reporting company or group thereof.

Further developments in Court 

The situation was complicated when, just 20 days later on December 23, 2024, in response to the Government’s appeal, the motions panel of the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) lifted the preliminary injunction issued by the Eastern District. 

Critically, the Court found in that instance that the Government had made a strong showing that is was likely to succeed on the merits in defending the CTA’s constitutionality, finding that the CTA’s aim was to regulate “and economic class of activities that have a substantial effect on interstate commerce,” and that the reporting requirement for reporting companies fell within “more than a century of [the Supreme] Court’s Commerce Clause jurisprudence.”  

The Fifth Circuit’s ruling not only lifted the injunction, but also reinstated the January 1, 2025, filing deadline for BOI reports. In the wake of the Fifth Circuit lifting the injunction, the Financial Crimes Enforcement Network (“FinCEN”), a branch of the U.S. Treasury Department in charge of administering and enforcing the CTA, extended the reporting deadline for most reporting companies until January 13, 2025, at the earliest. 

The Fifth Circuit’s order granted the Government’s emergency motion for a stay of the injunction pending appeal, while also expediting the appellate process to the next available oral argument panel. The Fifth Circuit’s merits panel now has the Government’s appeal pending before it, and that appeal remains on an expedited schedule. However, in a subsequent opinion issued on December 26, 2024, the Fifth Circuit held that, in order to preserve the constitutional status quo while the merits panel considers the parties’ substantive arguments, the portion of the motions panel’s order granting the Government’s motion to stay the preliminary injunction enjoining enforcement of the CTA and the Reporting Rule was vacated. 

Options for reporting companies 

While the procedural posture has been somewhat complex, the practical effects of the TTCS litigation to-date is fairly straight-forward. Reporting companies are left with the same three courses of actions that they had following the Eastern District’s December 3 ruling: 

1. File voluntarily – First, a reporting company can proceed with filing despite the injunction and stay of the reporting deadline. This is arguably the safest approach, however, it is important to understand that obtaining reimbursement for costs and fees incurred in filing is highly unlikely given that the federal government will argue that the United States has sovereign immunity in the event that final disposition of the issue finds that the CTA is unconstitutional.  
2. Prepare to file – Next, reporting companies and beneficial owners can take a “stand-by” approach, and continue preparing to file by (i) determining filing status; (ii) identifying beneficial owners; and (iii) gathering the information and documents required to complete BOI reporting. This approach splits the difference to an extent because it allows reporting companies to be ready for anything regardless of how challenges to the CTA resolve themselves in Court.  
3. Pause compliance efforts – Finally, reporting companies can hold off entirely on any further CTA compliance activities and rely on the injunction and stay of the filing deadline. The risk, of course, is that should the TTCS injunction be lifted, or should the CTA ultimately pass constitutional muster on the merits, coming into compliance with the CTA could be required on an accelerated timeline, which could leave reporting companies that choose to take no action scrambling to comply with an unknown amount of time in which to do so.  

Next steps 

The Government’s appeal remains pending, so reporting companies should continue to monitor the situation closely as it continues to develop and should continue to consult legal counsel to determine their filing status under the CTA and the best course of action in light of TTCS as it continues to make its way through the courts. 

© 2024 McNees Wallace & Nurick LLC
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