Media Center

December 6, 2024
Publications

On Tuesday, December 3, 2024, the Federal District Court for the Eastern District of Texas (the “Court”) issued an opinion in Texas Top Cop Shop, Inc. et al. v. Merrick Garland, Attorney General of the United States, et al. (“TTCS”), granting a nationwide preliminary injunction against the Corporate Transparency Act (“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.  This potential watershed ruling comes just a few weeks before approximately 32.6 million reporting companies would have been required to file BOI reports disclosing the identities of individuals exercising substantial controls over or owning 25% or more of the ownership interests of an entity.

The Case:
The Plaintiffs in TTCS were comprised of five (5) business entities and one (1) beneficial owner of one of the entity plaintiffs (collectively, “Plaintiffs”).  One of the Plaintiffs, the National Federation of Independent Business (“NFIB”) was a 501(c) tax-exempt entity, meaning it was not, in its own right, required to file any BOI reports under the CTA, but was suing on behalf of its member entities.  Many of NFIB’s approximately 300,000 members, however, would be subject to the CTA’s Reporting Rule.  In defense of the action at hand was Attorney General of the United States Merrick Garland, U.S. Treasury Secretary Janet L. Yellen, Financial Crimes Enforcement Network (“FinCEN”) Director Andrea Gacki, the Treasury Department, and FinCEN as a bureau of a federal agency that administers the CTA (collectively, “Defendants” or the “Government”).

The Plaintiffs initiated the lawsuit seeking a declaratory judgment that the CTA is unconstitutional and an injunction against its enforcement.  On June 3, 2024, Plaintiffs moved for a preliminary injunction against enforcement of the CTA and Reporting Rule.  After hearing the arguments of counsel on the pending motion on October 9, 2024, the Court came down with its decision to grant the injunction against the CTA and stay the rapidly approaching filing deadline pending further order of the Court.

The Plaintiffs argued that the CTA and Reporting Rule are unconstitutional, both facially and as-applied to the individual Plaintiffs, on the grounds that they (i) intrude upon States’ rights under the Ninth and Tenth Amendments; (ii) compel speech and burden Plaintiffs’ rights of association under the First Amendment; and (iii) violate the Fourth Amendment by compelling disclosure of private information.  Prior to granting the injunction, the Court required the Plaintiffs to establish four (4) elements: (1) a substantial likelihood of success on the merits; (2) a substantial threat that they would suffer irreparable harm absent injunctive relief; (3) that the threatened injury outweighs any damage that the injunction might cause; and (4) that the injunction will not harm the public interest.

The Court found that the Plaintiffs met their burden of establishing the four (4) elements required for a preliminary injunction, finding that the CTA is likely unconstitutional as contrary to the Tenth Amendment, and is not otherwise supported by one of Congress’s enumerated powers.  It is, however, the scope of the injunction granted by the Court that has veritably turned the situation surrounding the CTA on its head.  Typically, a preliminary injunction serves to enjoin, or prevent, certain actions as regards the active litigants in a case.  In TTCS, however, the scope of the injunction granted is significantly more sweeping.  Tasked with determining the breadth of the injunction, the Court entertained the arguments of both Plaintiffs and the Government on the matter.  The Plaintiffs argued that they only sought injunctive relief on behalf of the individual Plaintiffs, while the Government characterized this as an effective request for a nationwide injunction.  While the Plaintiffs averred that they only sought relief for themselves, it is important to keep in mind that NFIB’s membership extends across the United States, hence the Government’s position that enjoining the CTA and Reporting Rule (the scope of which included NFIB’s members) would in practical effect enter a nationwide injunction.  While the Court agreed with the Government’s logic, it nevertheless found a nationwide injunction to be appropriate, noting that the Constitution vests district courts with the judicial power of the United States but that this power is not limited to the district wherein the court sits but rather extends across the country.  Dismissing the argument that a nationwide injunction would curtail the percolation of legal debate among lower courts, the Court opined that its decision will not stop further consideration of the constitutionality of the CTA in other jurisdictions.

Ultimately, the Court determined that the preliminary injunction should apply nationwide, noting that the CTA and its Reporting Rule apply nationwide to approximately 32.6 million existing reporting companies.  Moreover, as the Government, whether intentionally or not, pointed out, NFIB’s membership extends across the country and the Court could not provide the Plaintiffs with meaningful relief absent a nationwide injunction.  As such, the Court granted a nationwide preliminary injunction against the CTA and Reporting Rule, and imposed a stay on the January 1, 2025, reporting deadline pending further order by the Court.

Effect on Reporting Companies:
The TTCS opinion may leave some reporting companies and their beneficial owners scratching their heads and wondering how they should proceed in light of the ruling.  At the outset of the decision-making process, it is important to understand what the TTCS ruling is and is not.  First and foremost, the ruling in TTCS is not a repudiation of the CTA and Reporting Rule as definitively unconstitutional.  Rather, the Court found that the CTA is likely unconstitutional and that the Plaintiffs in TTCS demonstrated a substantial likelihood of succeeding on the merits of their case.  Nothing, however, is very certain when dealing with the CTA.  The Court did not make any affirmative findings that the CTA or Reporting Rule are contrary to law or that they amount to a constitutional violation.  Moreover, TTCS is not the first legal challenge against the CTA for BOI reporting.  Three other federal district courts in Michigan, Oregon, and Virginia denied plaintiffs’ requests for preliminary injunctions, and in such cases found that the plaintiffs failed to demonstrate a substantial likelihood of success on the merits.

Almost all prior challenges to the constitutionality of the CTA (however decided) are now on appeal before their respective federal courts of appeals, and the Department of Justice, on behalf of the Department of the Treasury, filed a Notice of Appeal of the TTCS opinion on December 5, 2024.  Because the TTCS opinion will likely not be the last word on the matter of the CTA’s constitutionality, it is possibly premature to take any major actions at this time.  That said, for reporting companies and the beneficial owners thereof, the options for proceeding effectively come down to three (3) viable ones.  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.  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.  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.  This could leave reporting companies that choose to take no action scrambling to comply with a presently unknown amount of time in which to do so.  In this regard, reporting companies that chose to prepare to file without actually submitting BOI reports will find themselves in a better position to comply even under a compressed timeline. For its part, FinCEN has responded to the TTCS opinion maintaining that it continues to believe in the constitutionality of the CTA, and that, while it will comply with the injunction and stay of the filing deadline, reporting companies may continue to voluntarily submit BOI reports.

Attorneys across the United States will continue to closely monitor developments in litigation concerning the constitutionality of the CTA and Reporting Rule.  In the meantime, reporting companies and their beneficial owners find themselves in the frustrating position of not knowing what comes next.  Every situation is unique when it comes to reporting companies under the CTA.  If you are unsure of how you or your entity should proceed, you should consult your trusted legal counsel to determine whether you are subject to the CTA’s Reporting Rule, and if so, what the best avenue forward is for you to comply with the CTA and Reporting Rule, even on an accelerated timeline, in the event that they are found to be constitutionally aligned.

© 2024 McNees Wallace & Nurick LLC
McNees Client Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.