Corporate Transparency Act Enforcement Enjoined by Preliminary Injunction
On December 3, 2024, the United States District Court for the Eastern District of Texas granted a preliminary injunction in Texas Top Cop Shop, Inc. v. Garland temporarily enjoining enforcement of the Corporate Transparency Act (“CTA”) nationwide.
The CTA became effective as of January 1, 2024. The CTA requires reporting companies (corporations, limited liability companies, limited partnerships and similarly created entities and their foreign equivalents registered to do business in a U.S. state) to disclose certain information about individuals who either directly or indirectly own or control the reporting company to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).1
The plaintiffs in Texas Top Cop Shop claimed Congress overstepped its constitutional authority when it enacted the CTA. The district court’s order holds that neither the CTA nor the rules adopted thereunder by FinCEN may be enforced, and reporting companies need not comply with the January 1, 2025, deadline for filing CTA beneficial ownership reports.
The district court’s order is only a preliminary injunction and is not a final ruling on the constitutionality of the CTA. Enforcement of the CTA has been temporarily paused on a nationwide basis, but enforcement could resume if the government successfully appeals the district court's order. An appellate court could grant a stay of the injunction, or the government could ultimately prevail on the merits in arguing the CTA is constitutional.
Reporting companies who have not yet filed CTA beneficial ownership reports may, understandably, view this preliminary injunction as a compliance lifeline. However, the final outcome of litigation over the CTA’s constitutionality is uncertain, and we recommend reporting companies continue to review their ownership structure and, if they do not qualify for an exemption, prepare for compliance with the CTA. In the event the government files an appeal, the preliminary injunction may be stayed at any moment thereafter. If an appellate court stays the preliminary injunction, the temporary pause on the January 1, 2025, filing deadline could be revoked, and it is unclear if FinCEN would allow for any grace period as a result of the preliminary injunction. Reporting companies should take care to ensure they are ready to file a timely CTA beneficial ownership report if this occurs.
Hodgson Russ will continue monitoring CTA developments.
Disclaimer:
This client alert is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this client alert should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.
[1] For more information, please see our previous client alerts, “Reporting Requirements Under the Corporate Transparency Act: How Does it Affect My Company?” and “Corporate Transparency Act: FinCEN Updates and Guidance Ahead of January 1, 2024 Effective Date.”
