Federal Court Issues Preliminary Injunction Against Enforcement of the Corporate Transparency Act; DOJ Appeals

The United States District Court for the Eastern District of Texas has issued a preliminary injunction in Texas Top Cop Shop, Inc. v. Garland that halts the enforcement of the Corporate Transparency Act (CTA), which mandates certain companies to submit beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN). The government has appealed Judge Mazzant’s ruling to the Fifth Circuit Court of Appeals.

The Court's injunction applies nationwide, rather than just to specific plaintiffs, and relieves companies from having to comply with the CTA’s reporting requirements, enjoining FinCEN from nationwide enforcement of the CTA’s reporting requirements, and effectively staying the CTA’s January 1, 2025 reporting deadline.

The CTA aims to enhance transparency and combat financial crimes by requiring companies to disclose their ownership structures. However, the Court’s analysis echoes the sentiments of many business owners, “[t]he notion that one may use a company to veil their illicit financial crimes is unassailable. But the Commerce Clause does not justify regulating all companies based on nothing more than the fear that a reporting company might shelter a financial criminal.”

Prior to this ruling, more than 8 million BOI reports have been submitted to FinCEN, far less than the anticipated 32.6 million filings. The preliminary injunction, however, puts a temporary and national halt to the enforcement efforts related to these reporting obligations.

Different from NSBU v. Yellen

Given the number of cases challenging the constitutionality of the CTA around the country, many are wondering how Texas Top Cop Shop resulted in a national impact while others have not. The answer is a procedural one. This case closely follows a similar one brought in the Northern District of Texas that resulted in a nationwide injunction four months ago. There, the Court issued an injunction that stopped the Federal Trade Commission from enforcing a ban on noncompete provisions in employment agreements and successfully extended its application to the whole country. This Eastern District of Texas used the same approach for the CTA injunction, citing to a body of Fifth Circuit case law.

By comparison, the other more well-known CTA case is National Small Business United v. Yellen in the Eleventh Circuit. Unlike Texas Top Cop Shop, the NSBU ruling was instead one of summary judgment. Because the NSBU relief requested was declaratory and decided summarily, the Court never reached the scope of application. Therefore, its ruling was limited to the plaintiffs in that case.

Like NSBU, the Texas Top Cop Shop plaintiffs had in fact initially limited the scope of their request to only the plaintiffs. However, the court sua sponte determined that a national injunction was appropriate. It is notable here that the court may have had some help from the government during oral argument. Regarding the proper injunction scope, the government responded to the court’s line of questioning that if the plaintiffs won the injunction, it “would, in practical effect, be a nationwide injunction.” In the opinion, Judge Mazzant responds that, “The Court agrees with the Government’s point. A nationwide injunction is appropriate in this case.”

Next Steps

Where do companies go from here? The Court’s ruling is authoritative. It has made a legal determination that a nationwide scope is appropriate. Until that opinion is overturned or the preliminary injunction is lifted, it will continue to stand.

However, this preliminary injunction doesn’t permanently eliminate the CTA. Rather, the result will depend on the outcome of the government’s appeal.

While the incoming presidential administration supports the CTA in its concept, it has expressed reservations regarding its implementation and burden on small businesses (not coincidentally a topic of primary consideration in Texas Top Cop Shop). It is expected that the incoming president will want to take a look at the CTA’s current execution with a view to lightening the burden. This process could then be expected to result in further delays to its implementation.

Currently, companies should analyze their entities and determine their beneficial owners, gathering all appropriate information. They should be ready to file in the event that the injunction is lifted.

We continue to monitor the case and will provide updates as developments unfold.