CTA Update: Federal Court Halts Enforcement with Preliminary Injunction

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against enforcement of the Corporate Transparency Act (“CTA”). Although this ruling could relieve you of your duty to file your company’s Beneficial Ownership Information (“BOI”) report, the U.S. Department of Justice has already appealed the court’s action, and the BOI filing requirement could be reinstated on short notice. We therefore recommend you be prepared to file and stay up to date on this quickly changing legal landscape.

This alert does not constitute legal advice but does provide a brief update on recent litigation regarding the CTA and its reporting requirements. If you have remaining questions or would like our help in navigating these developments, please reach out to your regular GTC contact.

Background

The CTA, enacted in 2021, created an obligation for many companies across the nation to report their beneficial ownership information to FinCEN. Please see our client alert from November 5, 2024 (https://gtclawgroup.com/2024/11/corporate-transparency-act-filings-due-january-1-2025/) for basic information about the CTA filing requirements and an overview of the filing process.

The first filing deadline, for companies created or registered to do business in the U.S. before January 1, 2024, was set for January 1, 2025. However, Texas Top Cop Shop, Inc. et al. v Garland et al., has halted enforcement of the entire CTA, and as a result has suspended the filing requirements for the time being.

Litigation Developments

Six plaintiffs, including the National Federation of Independent Business (NFIB), brought a lawsuit challenging the constitutionality of the CTA under the Tenth Amendment and seeking an injunction against its enforcement. Although the CTA has withstood several legal challenges since its enactment, the court granted the plaintiffs’ motion for a preliminary injunction and gave it nationwide effect.

Judge Amos L. Mazzant ruled that the CTA is not a proper exercise of congressional power under the U.S. Constitution. Specifically, he reasoned that the CTA was not authorized under the Commerce Clause or the Necessary and Proper Clause and, as a result, is likely unconstitutional. Due to the NFIB’s large presence across the U.S., boasting over 300,000 members, the court applied the preliminary injunction nationwide, effectively blocking enforcement of the CTA and its BOI filing requirements for all reporting companies.

Under the preliminary injunction, the court ruled that companies currently do not need to comply with the CTA’s January 1, 2025 reporting deadline, pending further action by the court. However, on December 5, 2024, the Department of Justice (“DOJ”) appealed the case to the Fifth Circuit. To be clear, this ruling only means that enforcement of the act is temporarily suspended. The court has not made a final decision on the constitutionality of the CTA, and the result will likely depend on the outcome of the DOJ’s appeal.

FinCEN has released a statement confirming that reporting companies are not currently required to file and will not be held liable while the court order remains in force. FinCEN also stated that companies may still voluntarily submit their initial BOI report and that the government continues to believe that the CTA is constitutional.

Takeaways

Although the CTA is currently suspended, if the DOJ is successful on appeal and the preliminary injunction is lifted it could become enforceable again. This could lead to the reinstatement of the existing filing deadlines, including that for January 1, 2025, if the injunction is lifted before that date.

If your company has already filed its initial BOI report, no action is needed at this time. If your company has not filed or is in the process of filing, we recommend that you gather the beneficial ownership information and materials necessary to file in case the injunction is lifted.

If your company is subject to the reporting requirements of the CTA, you should carefully monitor the litigation developments in Texas Top Cop Shop and be on the lookout for any further action or notice issued by FinCEN.