The U.S. District Court for the Eastern District of Texas recently granted a nationwide preliminary injunction in the case Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al. This injunction enjoins the government from enforcing the Corporate Transparency Act ("CTA") and its implementing regulations, including the beneficial ownership information reporting requirements. This decision stays all deadlines for compliance with the CTA’s reporting requirements and temporarily exempts reporting companies from liability for failing to file their beneficial ownership information ("BOI") with FinCEN while the order remains in effect.
Key Findings of the Court
The court found that the CTA is likely unconstitutional because it exceeds Congress’s powers. Specifically:
- Federal Overreach into State Matters: The court held that the CTA represents a federal attempt to monitor companies created under state law, a matter traditionally reserved for state jurisdiction.
- Infringement on Anonymity: According to the court, the CTA’s requirements end corporate anonymity, which the court noted is a feature of corporate formation designed by many states.
- Commerce Clause and Necessary and Proper Clause: The court rejected the government’s arguments that these constitutional provisions justify the CTA, and stated that the Act improperly expands Congress’s enumerated powers.
- Irreparable Harm: The court found that compliance with the CTA would result in nonrecoverable costs, including legal fees, and force reporting companies to disclose private information, potentially violating First and Fourth Amendment protections.
While the court’s ruling enjoins enforcement of the CTA, it did not definitively rule on the CTA’s constitutionality.
FinCEN’s Response
Following the court’s decision, FinCEN clarified that reporting companies are not currently required to file their BOI reports and will not face penalties for non-compliance during the injunction’s duration. However, reporting companies may voluntarily submit BOI reports if they wish to do so. FinCEN emphasized the CTA’s importance in combating illicit financial activities and creating a fairer business environment, while also confirming its commitment to compliance with the court’s order.
Ongoing Litigation
The Texas Top Cop Shop case is one of several legal challenges to the CTA. While the Eastern District of Texas has granted this preliminary injunction, other courts, including the Eastern District of Virginia and the District of Oregon, have ruled in favor of the Department of the Treasury related to the constitutionality of the CTA. The Department of Justice has filed a Notice of Appeal for the Texas case, and litigation is ongoing.
Next Steps for Reporting Companies
While the injunction is in effect, reporting companies are not obligated to file their BOI reports. However, companies should evaluate their options carefully in light of the uncertainty surrounding the injunction and potential appellate outcomes. Three approaches to consider are:
- Proceed as though the injunction will be lifted and file BOI reports now to ensure compliance regardless of the litigation outcome.
- Adopt a "wait and see" approach by gathering all necessary information and preparing to file quickly if the injunction is lifted, which avoids a last-minute rush and potential noncompliance penalties.
- Assume the injunction will be upheld and defer filing, recognizing the possibility of needing to act swiftly if circumstances change.
Given the uncertainty, companies should weigh their risk tolerance. The conservative approach is to voluntarily file a BOI report now, particularly if preparations for timely filing were already underway before the injunction. Voluntary filing ensures compliance even if the injunction is lifted unexpectedly.
OMW will continue to monitor developments in the litigation and provide updates regarding the CTA and any changes to FinCEN's requirements.
This summary is a broad overview of a complex topic, and it does not constitute legal advice. If you have any questions, feel free to contact Casey Moriarty (cmoriarty@omwlaw.com), Yejin Kim (ykim@omwlaw.com), Elliot Min (emin@omwlaw.com), or any other attorney of the Ogden Murphy Wallace, P.L.L.C. Corporate & Transactions Law Group. If you wish to have your Beneficial Ownership Information filed to the Financial Crimes Enforcement Network by legal professionals, please contact ccollison@omwlaw.com.
