Corporate Transparency Act
Texas Top Cop Shop Inc. v. Merrick Garland
Date: Dec. 26, 2024
Issue: Whether the Corporate Transparency Act (CTA) and the final rule implementing the CTA (the Reporting Rule) are unconstitutional.
Case Summary: The U.S. Government filed an application in the U.S. Supreme Court for a stay of the nationwide preliminary injunction of the CTA and Reporting Rule.
The CTA requires companies doing business in the United States to report information about the individuals who ultimately control or own them. The CTA aims to provide law enforcement with information to detect, prevent, and punish terrorism, money laundering, and other misconduct through business entities. In 2022, the Financial Crimes Enforcement Network (FinCEN) issued the Reporting Rule, providing that certain businesses must file a beneficial ownership information (BOI) report with FinCEN and disclose details about the individuals who have substantial ownership or control over the company.
On March 1, 2024, the Northern District of Alabama ruled that the CTA is unconstitutional in National Small Business United v. Yellen. The court permanently enjoined the CTA’s enforcement, but only as to the plaintiffs in that case.
On May 28, 2024, six plaintiffs, consisting of one individual, three commercial businesses, a political organization, and a national trade association, sued U.S. Attorney General Merrick Garland, the U.S. Department of the Treasury, FinCEN, and their respective directors (collectively the government) challenging the constitutionality of the CTA and the Reporting Rule. In their complaint, plaintiffs argued the CTA: intrudes upon states’ rights under the Ninth and Tenth Amendments; compels speech and burdens plaintiffs’ right of association under the First Amendment; and violates the Fourth Amendment by compelling disclosure of private information. Plaintiffs also argued the Reporting Rule violates the Administrative Procedure Act. Plaintiffs also moved the court for a preliminary injunction to enjoin enforcement of the CTA and Reporting Rule.
Preliminary injunction. On Dec. 3, 2024, Judge Amos Mazzant of the Eastern District of Texas granted a preliminary injunction enjoining the CTA and Reporting Rule. After determining that each of the plaintiffs had standing (and that the trade association had associational standing to sue on behalf of its members), the court turned to the plaintiffs’ burden in seeking a preliminary injunction. The court determined the plaintiffs are substantially likely to succeed on the merits; the plaintiffs are threatened with irreparable harm by the CTA; the balance of equities favored issuance of an injunction. As to plaintiffs’ likelihood of success on the merits, the court evaluated the defendants’ arguments that the CTA is constitutional under the Commerce Clause and the Necessary and Proper Clause. The court concluded that neither avenue justified Congress’s enactment of the CTA, and that the plaintiffs had thus met their burden to show substantial likelihood of success on the merits of their Tenth Amendment challenge. As to the scope of the injunction, the court determined that the injunction should apply nationwide — not limited to the plaintiffs and trade association’s membership.
Stay pending appeal. On Dec. 23, 2024, a Fifth Circuit motions panel granted the government’s emergency motion for a stay pending appeal. Under Nken v. Holder, a court must consider four factors when deciding whether to grant a stay pending appeal: whether the stay applicant has made a strong showing that he is likely to succeed on the merits; whether the applicant will be irreparably injured absent a stay; whether issuance of the stay will substantially injure the other parties interested in the proceeding and where the public interest lies.
The motions panel found that the government made a strong showing that it is likely to succeed on the merits in defending the CTA’s constitutionality, emphasizing that Congress used its broad Commerce Clause authority to pass the CTA to combat illicit financial activities. The panel explained the CTA regulates anonymous ownership and business operation, which is “part of an economic class of activities that substantially affect interstate commerce.” Therefore, the court concluded that requiring reporting from entities engaged in such economic activities aligns with “more than a century of the Supreme Court’s Commerce Clause jurisprudence,” making the CTA likely constitutional.
Next, the motions panel determined that the government would suffer irreparable harm absent a stay. It explained that “any time a court prevents a [government] from enforcing laws passed by representatives of its people, it suffers irreparable injury.” The panel also concluded that the government met the third and fourth factors because a stay would cause minimal harm to the plaintiffs, while the public has a pressing interest in combating financial crimes and safeguarding national security.
Merits panel vacates stay. On Dec. 26, 2024, a Fifth Circuit merits panel vacated the stay pending appeal and reinstated the nationwide injunction. The panel decided to preserve the constitutional status quo while considering the parties’ substantive arguments.
Application for stay of the injunction. On Jan. 1, 2025, the government applied for a stay of the injunction issued by the district court. To obtain a stay of a district court’s injunction pending the disposition of a petition for a writ of certiorari, an applicant must show: a reasonable probability that the U.S. Supreme Court would grant certiorari; a likelihood of success on the merits; and a likelihood of irreparable harm in the absence of a stay. In “close cases,” the Court “will balance the equities and weigh the relative harms.” In its application, the government made five main arguments.
First, the government argued the U.S. Supreme Court has traditionally applied a strong presumption in favor of allowing challenged Acts of Congress to remain in force pending the Court’s final review. The government also argued the Supreme Court grants a stay in “virtually all” cases where a lower court finds an act of Congress unconstitutional, if the government requests it.
Second, the government argued that if the Fifth Circuit affirms the district court’s injunction, the U.S. Supreme Court would likely grant certiorari and reverse. According to the government, the Commerce Clause and Necessary and Proper Clause empower Congress to adopt the CTA’s reporting requirements. The government also claimed that Plaintiffs failed to meet the high standard required for a facial challenge.
Third, the government argued the equities support a stay. The government claimed the district court’s injunction subjects it to serious and irreparable harm. The government also claimed that the district court relied on the fact that plaintiffs would incur “compliance costs” without an injunction, despite not denying these costs would be minimal.
Fourth, the government argued at minimum the Court should grant a partial stay of the district court’s “vastly overbroad” injunction. The government argued that the Court should, at a minimum, narrow the injunction to apply only to Plaintiffs and the National Federation of Independent Business members identified in the complaint. According to the government, the Court has acknowledged universal remedies exceed the authority of Article III courts, contradict longstanding limits on equitable relief, and place a significant burden on the federal court system.
Finally, the government argued the Court may wish to grant certiorari before judgment to consider the lawfulness of universal relief. The government maintained that lower courts have repeatedly grappled with the issue of whether district courts can award universal relief for years, and several Supreme Court justices have called for the Court to review it in a suitable case.
Bottom Line: On Dec. 27, 2024, FinCEN released a statement on its website once again noting that “reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force.” FinCEN will continue to accept beneficial ownership reports voluntarily.
Documents:
Preliminary Injunction Opinion
Order Granting Stay
Order Vacating Stay
Application
