Days after a judge in Texas ruled that a nationwide preliminary injunction barring FinCEN from enforcing the Corporate Transparency Act (CTA) would stand, the U.S. Court of Appeals for the Fifth Circuit has declared the opposite. In a December 23, 2024 ruling, a unanimous Fifth Circuit bench granted the government’s emergency motion for a stay pending the appeal.
The reversal means that businesses which were required to file Beneficial Ownership Reports (BOI) must file while the government’s appeal winds its way through the court system unless they are otherwise exempt.
Companies and their advisors had hoped that the preliminary injunction would give them a breather, but that doesn’t appear to be the case. Currently, the deadline for companies which existed before January 1, 2024, to report is January 1, 2025.
Initial Ruling
In Texas Top Cop Shop, Inc., et al. v. Garland, et al., Judge Amos Mazzant granted the request of the National Federation of Independent Business (NFIB) for a preliminary injunction, blocking the U.S. Department of Treasury from enforcing the CTA’s reporting requirements. Because NFIB and its nearly 300,000 members were a party to this case, the judge blocked enforcement of the BOI reporting requirements nationwide.
In his 74-page ruling, Judge Mazzant declared, “Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional.”
FinCEN Responds
In response to the initial ruling, FinCEN posted a statement on its website that “[t]he government continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.”
Nonetheless, FinCEN stated, “While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect.” The agency added that “reporting companies may continue to voluntarily submit beneficial ownership information reports.”
The Government Responds
The government filed a notice of appeal with the U.S. Court of Appeals for the Fifth Circuit on December 5, 2024.
About a week later, on December 11, the government filed a Motion to Stay Preliminary Injunction Pending Appeal. Basically, the government asked the court to lift the injunction while the matter was being heard—this would have meant that it was business as usual, and the original deadline would stand.
As part of its motion, the government asserted that if the Court did not grant the stay by December 12 or 13, the government would ask for the same relief in the Fifth Circuit Court of Appeals.
Texas Ruling, Part II
After a flurry of legal maneuvers, Judge Mazzant issued his ruling on December 17 in the U.S. District Court for the Eastern District of Texas, refusing to grant a stay of the injunction.
Fifth Circuit, Part II
As it said it would do, the government filed an emergency motion with the U.S. Court of Appeals for the 5th Circuit for an immediate stay. A stay is particularly appropriate in these circumstances, the government argued, claiming that “[a]lthough the statute was enacted in January 2021, plaintiffs did not institute this litigation until this year, causing the district court’s injunction to take effect shortly before a reporting deadline of January 1, 2025, and at the height of the government’s extensive outreach efforts to ensure that it obtains the information necessary for its enforcement efforts.” In contrast, the government argued that any harm to the plaintiffs would be minimal.
The government asked the court to grant a stay or, in the alternative, to narrow the injunction to the companies that have been specifically identified in the district court or, at a minimum, to the members of NFIB.
By letter of December 13, the court accelerated the briefing schedule, requesting a final response by December 19. As I previously noted, that meant it was likely that a ruling could come shortly after that—bringing the deadline of January 1, 2025, for reporting companies formed before January 1, 2024, to file their BOI reports back into play.
That’s exactly what happened.
In the opinion, Circuit Judges Stewart, Haynes, and Higginson poked holes at the district court ruling, writing, “Independently, the government has made a strong showing against the Businesses’ facial challenge to the CTA.” That means, the court wrote “Here, the CTA at least operates constitutionally when it requires that corporations engaged in business operations affecting interstate commerce disclose their beneficial owner and applicant information to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”),” before concluding, “Thus, the statute is likely constitutional on its face.”
The panel had no sympathy for fears of a last-minute scramble, writing, “The Businesses warn that lifting the district court’s injunction days before the compliance deadline would place an undue burden on them. They fail to note, however, that they only filed suit in May 2024 and the district court’s preliminary injunction has only been in place for less than three weeks as compared to the nearly four years that the Businesses have had to prepare since Congress enacted the CTA, as well as the year since FinCEN announced the reporting deadline.”
You can read the order here.
Reactions
The ruling was issued late Monday afternoon, just as many businesses and their advisors were heading out for the holidays.
A request for comment from FinCEN was not immediately returned.
However, Ian Gary, Executive Director of the FACT Coalition, issued a statement saying, “Today’s decision pauses the harmful and erroneous injunction that threatened to delay the implementation of this vital law. For years, police and prosecutors have tried to combat a flood of dirty money associated with often violent crimes, but that can’t happen if they run into a wall of shell companies and secrecy.”
He continued, “Today’s ruling finds that the CTA is likely constitutional, as Congress had every right to open the money trail so our law enforcement officials can crack down on the crooks and criminals who abuse the system.”
Congressional Acts
Since Congress was responsible for passing the law in the first place—it was pushed through in 2021—Congress could take steps to stop or extend it. So far, that hasn’t happened.
Earlier this week, Congressional leaders had released the text of a proposed funding measure intended to fund the government through March 14, 2025. Language that would delay the BOI reporting requirements under the CTA was tucked into the 1,547 pages. As written, the bill would change the reporting date for existing entities to January 1, 2026 (as opposed to the original January 1, 2025). However, the final bill approved by Congress did not include the extension language.
Other Court Rulings
The Top Shop case isn’t the only case pending in the courts. A federal court ruling in a lawsuit filed by the National Small Business United (also known as the National Small Business Association, or NSBA) and Isaac Winkles found the CTA unconstitutional. On March 1, 2024, U.S. District Judge Liles C. Burke of the Northern District of Alabama, Northeastern Division, a Trump appointee, wrote, “Congress sometimes enacts smart laws that violate the Constitution.” This case, he continued, “illustrates that principle.”
The result in that case is that the plaintiffs—members of the NSBA as of March 1, 2024—were not required to file BOI reports. The government immediately appealed the ruling to the Eleventh Circuit, and the oral arguments were heard in October of this year. It’s not certain when a ruling might come down.
After today’s Fifth Circuit ruling, NSBA President and CEO Todd McCracken issued a statement declaring, “This unwelcome roller-coaster ride couldn’t come at a worse time for America’s small businesses. Unfortunately, because the Court agreed to hear the expedited appeal in their case, the ruling came quick, reversing the few weeks of relief America’s small-business owners thought they had.”
Noting the impending deadline, McCracken added, “Within the span of a week, small-business owners thought they had at least a few extra weeks to comply, then they thought they had a full year, now it’s just ONE week.”
However, McCracken noted that the matter was far from over, saying, “NSBA will continue to fight. We will not go quietly; we will push for the unconstitutional CTA to be overturned through our lawsuit and repealed by Congress. It’s what America’s small businesses deserve.”
Two other courts—the United States Court of Appeals for the Fourth Circuit and the United States Court of Appeals for the Ninth Circuit—also have CTA case appeals on their dockets.
Next Steps
So what comes next? Businesses that are not protected by an earlier court ruling—like members of the NSBA—or an exemption are required to file.
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial report. This is true even if the company was created years before 2024.
A reporting company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report, while reporting companies created or registered on or after January 1, 2025, will have 30 calendar days creation or registration to file their initial reports with FinCEN.
For more on the reporting requirements, see this previous article.
(Note: This is a developing story.)
Read the full article here