Texas District Court Issues Nationwide Preliminary Injunction on Corporate Transparency Act Which Requires Disclosing Beneficial Ownership Information to FinCEN

On December 3, 2024, the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction in the case of Texas Top Cop Shop, Inc., et al. v. Garland, et al. (Case No. 4:24-cv-478), prohibiting the federal government from enforcing the Corporate Transparency Act (CTA). 

As previously reported by our firm, Congress enacted the CTA in 2021 as part of the National Defense Authorization Act for fiscal year 2021 to counter money laundering, the financing of terrorism, and other illicit financing activities. Notably, while states do not mandate the disclosure of companies’ beneficial ownership information (BOI), the CTA requires most businesses to report this information to FinCEN.

The deadlines for filing the BOI report under the CTA (stayed by the Texas Top Cop Shop decision) are as follows:

• January 1, 2025, for companies existing as of December 31, 2023;
• For entities formed in 2024, 90 days since their formation; and
• For entities created or registered after 2024, within 30 days of their formation.

In issuing the preliminary injunction, the court characterized the CTA as “quasi-Orwellian” and expressed concerns about its implications for federalism. The ruling suggests that the CTA’s requirement for entities to continually disclose information to the federal government could set a dangerous precedent for congressional power over companies.

Key Points of the Ruling

1. Scope of Injunction: The court’s order applies nationwide, enjoining enforcement of the CTA and the related FinCEN regulations.
2. Reporting Deadline Suspended: Reporting companies are not required to comply with the January 1, 2025 BOI reporting deadline (or other applicable deadlines under the CTA).
3. Constitutional Concerns: The court found that the CTA likely exceeds Congress’s legislative powers and poses substantial threats to companies’ constitutional rights.

Implications for Businesses

• Immediate Relief: An estimated 32.5 million companies in the United States are temporarily relieved from the obligation to submit sensitive information about their beneficial owners to FinCEN. The injunction also covers companies created or registered in the U.S. during 2024, which were required to submit BOI reports within 90 days of creation or registration.
• Penalties Suspended: FinCEN cannot enforce any of the CTA’s penalties for willful noncompliance against entities or individuals while the injunction is in effect.

Next Steps and Considerations

1. Appeal Possible: The government is likely to appeal this decision to the U.S. Court of Appeals for the Fifth Circuit, with a potential further appeal to the U.S. Supreme Court.  
2. Other Ongoing Challenges: This case is one of the many pending cases challenging the CTA across the country. Here are some of them:
   1. The Northern District of Alabama has suspended the CTA’s enforcement against the National Small Business Association (NSBA) and its members in the case National Small Business Association, et al. v. Yellen (appeal pending); and
   2. The District of Oregon refused to impose a preliminary injunction on the CTA’s enforcement in the case of Firestone v. Yellen (dispositive ruling on the merits pending).
3. Stay Informed: While compliance under the CTA is not currently required, businesses should remain prepared for potential changes in the legal landscape, given the several other pending cases and the potentially temporary nature of a preliminary injunction.

Recommendations

1. Monitor Developments: Stay informed about the pending cases challenging the CTA and any appeals or changes to the preliminary injunction.
2. Maintain Readiness: Although compliance is not currently required, be prepared to comply quickly if the injunction is lifted or modified.
3. Consult Legal Counsel: For specific questions or concerns about how this ruling affects your company and the procedural details affecting the CTA’s future, consult with your trusted legal counsel.

While this injunction provides temporary relief from CTA compliance, the ultimate fate of the Act remains uncertain. We will continue to monitor this situation closely and provide updates as they become available.

The CommLaw Group can help!
Given the potentially temporary nature of the preliminary injunction, our clients are encouraged to monitor the developments, determine whether the reporting requirements apply to them, given the CTA’s many exceptions, and potentially prepare their filings in advance.

Contact us if you need assistance, and we will be happy to help you navigate the fluid regulatory landscape.

Jonathan S. Marashlian – Tel: 703-714-1313 / E-mail: jsm@CommLawGroup.com
Michael Donahue — Tel: 703-714-1319 / E-mail: mpd@CommLawGroup.com
Diana James – Tel: 703-663-6757 / E-mail: daj@CommLawGroup.com