Resources

On December 3, 2024, Judge Mazzant of the U.S. District Court for the Eastern District of Texas, Sherman Division, enjoined the Federal Government from enforcing the Corporate Transparency Act (CTA). To date, the case, Texas Top Cop Shop, Inc., et al v. Garland et al, No. 4:2024cv00478 - Document 30 (E.D. Tex. 2024), has garnered a lot of buzz.

Background
Following the passage of the CTA and effective January 1, 2024, many companies in the U.S. were slated to report information about their “beneficial owners” (individuals who ultimately own or control a company) to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury (Treasury). These reports are referred to as “BOI reports”. Under the CTA there are severe penalties for not timely and accurately filing the required BOI reports. As the December 31, 2024, initial filing deadline neared, attorneys, accountants and other advisors have been advising clients to get the filings completed.

Analysis
In Texas Top Cop, one private individual and five entities, including the aforementioned Texas Top Cop (a family-run, Texas corporation selling equipment to first responders), sought to enjoin the Federal Government from enforcing the CTA and its Implementing Regulations. It filed its lawsuit on May 28, 2024, seeking a declaratory judgment that the CTA is unconstitutional and an injunction against its enforcement. On October 9, 2024, the Court heard arguments from both the plaintiffs and defendants. In ruling for Texas Top Cop, the court agreed that the CTA intrudes upon States’ rights under the Ninth and Tenth Amendments, and is likely [emphasis added] outside of Congress’s power. What the court did not due was address whether the CTA compels speech and burdens the right of association under the First Amendment, and the CTA violates the Fourth Amendment by compelling disclosure of private information.

Fallout
Following Texas Top Cop, uncertainty has arisen regarding whether clients should file their BOI reports. After all, the Federal Government is enjoined from enforcing the CTA, right?

The answer depends.

Previously, on March 1, 2024, in National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. 2024), a federal district court in the Northern District of Alabama, Northeastern Division, entered a final declaratory judgment, concluding that the CTA exceeds the Constitution’s limits on Congress’s power and enjoined Treasury and FinCEN from enforcing the CTA. The difference between National Small Business United and Texas Top Cop is that National Small Business United applied solely to the plaintiffs who filed the case, while Texas Top Cop Shop applies to all.

In other cases outside of Texas, courts have declined to issue a nationwide injunction. See Small Business Association of Michigan et. al. v. Yellen et. al., No. 1:2024cv00314 (W.D. Mich. Apr. 26, 2024) (Michigan U.S. District Judge denies preliminary injunction of the CTA); Firestone v. Yellen, No. 3:24-cv-01034 (D. Or. June. 26, 2024) (Oregon U.S. District Judge declines to enjoin enforcement of the CTA); and Community Associations Institute v. Yellen, No. 1:24-cv-1597 (E.D. Va. Oct. 24, 2024) (Virginia U.S. District Judge denies preliminary injunction of the CTA).

What to do now?
After National Small Business United, the FinCEN website posted an alert reiterating that the final declaratory judgment only applied to the particular individuals and entities subject to the Northern District of Alabama’s injunction. It stressed that “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.” It will be interesting to see whether the FinCEN website will be updated in the coming days to address the Texas Top Cop injunction.

Regardless, enforcement of the CTA has been enjoined at least temporarily by the Texas Top Cop Shop case. While the federal government is likely to appeal the Texas decision, the changes in leadership at the Department of Justice resulting from the incoming Trump administration leaves the long-term status of the CTA uncertain.

To navigate this uncertain landscape, business owners are encouraged to consult with their BMD legal advisers or BMD Member Blake Gerney at brgerney@bmdllc.com.