Upset in the 11th Hour: Corporate Transparency Act Halted, for Now

The Law

The Corporate Transparency Act (“the CTA”), a law enacted by Congress requiring certain business entities to disclose beneficial ownership information (a “BOI Report”) to FinCEN, went into effect on January 1, 2024, and obligates reporting companies formed before January 1, 2024, to file BOI Reports on or before January 1, 2025.

The Challenge

On May 28, 2024, six plaintiffs filed a lawsuit in the U.S. District Court for the Eastern District of Texas (the “Court”) seeking declaratory judgement that the CTA is unconstitutional. The following week, plaintiffs moved to enjoin enforcement of the CTA and the final rule implementing the CTA (the “Reporting Rule”) on the basis that the CTA is unconstitutional both on its face and as applied under the First, Fourth, Ninth and Tenth Amendments of the US Constitution.

The Opinion

On December 3, 2024, the Court granted a nationwide injunction of the CTA and the Reporting Rule, finding that “it is in the public’s best interest to prevent the Government from enforcing the CTA and Reporting Rule”. Thus, the government is enjoined from enforcing the CTA and the Reporting Rule, and the compliance deadline for implementing regulations is stayed under the Administrative Procedure Act.

What Does This Mean?

Reporting companies are NOT required to file BOI Reports with FinCEN—for now.

The Jurisdiction of the Court

If the government chooses to appeal this injunction, the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) will hear the appeal. The Fifth Circuit adjudicated a nationwide injunction in the 2015 case of Texas v. U.S. In Texas, the Fifth Circuit noted that “the Constitution vests the District Court with ‘the judicial Power of the United States.’ That power is not limited to the district wherein the court sits but extends across the country. It is not beyond the power of a court, in appropriate circumstances, to issue a nationwide injunction.” 809 F.3d 134, 188.

The Reasoning

While the injunction is only preliminary, the court determined that “[d]ue to the fast-approaching deadline for reporting companies to file BOI Reports, the Court cannot render a meaningful decision on the merits before Plaintiffs suffer the very harm they seek to avoid”. Although the Court has yet to adjudicate the constitutionality of the CTA, it found that the Plaintiffs “met their burden to show a substantial likelihood of success on the merits”.

In sum, the injunction of the CTA is only preliminary. While this most recent opinion thoroughly deconstructed the constitutionality of the CTA, the Court has yet to issue a final decision on the law. Further, the government will likely appeal this decision to the Fifth Circuit, where it may be overturned.

Next Steps

The future of the CTA is unclear but, for now, CTA obligations are on pause. However, although enforcement of the CTA is halted, the injunction may be overturned on appeal, and if overturned, owners may need to act quickly to comply. Notwithstanding the injunction, reporting companies may still choose to file a BOI Report at the present time.