CLIENT ALERT: Federal Court Enjoins CTA Enforcement; Jan 1 Deadline Stayed

On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a nationwide preliminary injunction in Texas Top Cop Shop, Inc., et al. v. Garland, et al., a case that enjoins the federal government from enforcing the Corporate Transparency Act (the “CTA”) and the final rule implementing the CTA (the “Reporting Rule”).

In its ruling, the court found that the CTA, and its implementation via the Reporting Rule, is likely unconstitutional. The court granted the plaintiffs’ motion for a preliminary injunction, and ruled that neither the CTA nor the Reporting Rule can be enforced. Specifically, the court ruled that “reporting companies need not comply with the CTA’s January 1, 2025” reporting deadline.

Corporate Transparency Act Background

The CTA, which went into effect on January 1, 2024, requires “reporting companies” in the United States to disclose information about their beneficial ownership and other company information to the Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a division with the US Department of the Treasury that aims to prevent money laundering and other financial crimes affecting national security. FinCEN is also tasked with implementing the new requirements under the CTA.

Under the CTA, subject to 23 enumerated exemptions, a “reporting company” is (i) any domestic corporation, limited liability company, or similar entity, or (ii) any foreign entity regis- tered to do business in the United States. The CTA had required domestic and foreign com- panies already in existence or registered in the U.S. prior to January 1, 2024, to file their initial report online with FinCEN no later than January 1, 2025. Please see our recent Client Alert here providing further detail on the CTA and beneficial ownership information.

Case Background and Holding

The case involves six plaintiffs: one private indi- vidual and five entities. The plaintiffs filed this lawsuit seeking a declaratory judgment that the CTA, and thereby the Reporting Rule, is uncon- stitutional and an injunction against its enforce- ment. They argued that Congress exceeded its constitutional authority when passing the CTA.

Connect With Us!

In a 79-page order, Judge Amos L. Mazzant ruled that the plaintiffs had met their burden for obtaining an injunction, demonstrating that (1) they would suffer irreparable harm if forced to comply with the CTA; (2) they were likely to succeed on the merits of their claims; (3) the potential harm to them would outweigh any damage the injunction might have on the Government; and (4) the preliminary injunctive relief would not harm the public. While the plaintiffs requested a preliminary injunction on behalf of themselves and their members, the court issued a nation- wide injunction. Since one of the plaintiffs represents members nationwide, the court exercised its discretion and concluded that a nationwide injunction was appropriate.

Consequence of the Preliminary Injunction

The Court’s order provides that neither the CTA nor the Reporting Rule adopted by FinCEN may be enforced and that reporting companies need not comply with the CTA’s upcoming January 1, 2025 deadline for filing Beneficial Ownership Information Reports. This also means that reporting companies would not need to file corrections, amendments, or report a newly applicable exemption to comply with the CTA and Reporting Rule requirements regarding the same.

Potential Next Steps

We note that this is a preliminary injunction and not a final decision, therefore additional proceedings could overturn or modify this order. The Department of Justice is likely to appeal this decision to the United States Court of Appeals for the Fifth Circuit. As part of its appeal, the Department of Justice may seek an emergency stay of the district court’s order, meaning compliance would be required in the interim. The likelihood of whether the Fifth Circuit will grant any request by the government to stay the order or whether it will ultimately affirm or reverse the nationwide injunction is unknown. Irrespective of outcome in the Fifth Circuit, a further appeal to the United States Supreme Court would not be unexpected.

What Does This Mean For You?

If you qualify as a “reporting company” the obligation to complete the Beneficial Ownership Information Reporting no longer applies. To the extent that the preliminary injunction is lifted or modified such that compliance is later required, it is plausible that FinCEN would issue an exten- sion to the January 1, 2025 deadline for filing Beneficial Ownership Information Reports to account for any time lost to addressing the pre- liminary injunction. If you have already filed a Beneficial Ownership Information Report, you do not need to do anything further, such as filing amendments if information has changed.

Gesmer Updegrove will continue monitoring developments in this area. In the meantime, if you have any questions about the CTA or this injunction, please contact Peter Moldave, Zane Fernandez, or Raissa Lima.