December 9th, 2024

Federal Court Suspends Corporate Transparency Act Enforcement

On Tuesday, December 3, 2024, in the case of Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478-ALM (E.D. Tex.), the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against enforcement of the Corporate Transparency Act (“CTA”), and stayed the January 1, 2025 beneficial ownership information (“BOI”) reporting deadline for entities formed prior to 2024. The Court did not specifically rule that the CTA is unconstitutional, but for purposes of issuing the injunction, concluded that the CTA and the final rule implementing the CTA (the “Reporting Rule”) are likely unconstitutional because they exceed Congress’ authority. (The decision can be read here.)

The Texas Top Cop Shop, Inc. decision was not the first time that a court had issued an injunction against enforcement of the CTA. In Nat’l Small Bus. United v. Yellen, the U.S. District Court for the Northern District of Alabama enjoined enforcement of the CTA but limited the scope of the injunction to the plaintiff in that case. The Court in the Texas Top Cop Shop case, however, did not limit its ruling to the plaintiff, instead extending application of the injunction nationwide. The Northern Alabama District Court decision in the Nat’l Small Bus. United case is under review by the U.S. Court of Appeals for the 11th Circuit and is expected to be decided this coming spring. The preliminary injunction issued in Texas Top Cop Shop would, if appealed, be subject to review by the U.S. Court of Appeals for the 5th Circuit. The Department of Justice (the “DOJ”) will now have to decide whether to appeal that ruling, and whether to seek any immediate emergency relief from the 5th Circuit during the pendency of the appellate process. In the Nat’l Small Bus. United case, the DOJ did not seek emergency relief from the 11th Circuit pending appeal, perhaps because of the limited application to the plaintiff in that case. The DOJ’s calculus may be different with respect to the Texas Court’s ruling, given, among other factors, the broader scope of the injunction and the approaching transition to a new administration and new DOJ leadership in January 2025.

As a result of the Texas Top Cop Shop ruling, all reporting companies are not currently required to comply with the CTA’s January 1, 2025 reporting deadline (or sooner, in the case of reporting companies formed in 2024 required to file within 90 days following formation) pending further orders from the district court or the outcome of an appeal.

Our firm is monitoring developments relating to the CTA. As of this writing, there has been no comment from, or further action by, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), but further guidance or court decisions could reinstate the CTA’s enforceability and/or potentially adjust the reporting deadlines. Clients and reporting companies should stay tuned for further updates, as developments or rulings may impact their CTA compliance obligations. In the meantime, we are available to assist our clients in analyzing their BOI reporting obligations, as well as gathering the required reporting information, so they can be prepared to timely file their BOI reports with FinCEN if the injunction is lifted.

If you have questions, please contact Jeffrey Marks at (212) 826 5536 or jmarks@fkks.com, Jay Rand at (212) 705 4825 or jrand@fkks.com, Lee Silver at (212) 705 4826 or lsilver@fkks.com, Deborah Wolfe at (212) 826 5573 or dwolfe@fkks.com, Jonah Brill at (212) 705 4897 or jbrill@fkks.com, or any other member of the Frankfurt Kurnit Corporate Group.

For additional information pertaining to the CTA, please see our October 2023 Corporate Alert and our March 2024 Corporate Alert.