'Great News' for Businesses? Judge Halts Transparency Mandate

Citing constitutional concerns, U.S. District Judge Amos Mazzant of the Eastern District of Texas in Sherman ordered a temporary injunction halting certain financial reporting requirements of the Corporate Transparency Act.

He granted the motion for preliminary injunction sought by the National Federation for Independent Businesses and numerous other small business plaintiffs.

Mazzant concluded that the CTA, as well as the U.S. Department of the Treasury's rule to implement it, are "likely unconstitutional as outside of Congress's power."

Matt Bisanz, a Mayer Brown partner in the firm's financial services practice who formerly worked at the U.S. Securities and Exchange Commission, said, “This is great news for the more than 32 million American businesses who were facing a year-end deadline to disclose their private information to the government."

Bisanz said that the Financial Crimes Enforcement Network is likely to consider an emergency appeal. "Hopefully FinCEN gets the message from the court’s decision and does not try to impose an inequitable burden on new companies,” he said.

Ian Gary, executive director of The FACT Coalition, a nonpartisan alliance of more than 100 state, national, and international organizations that promotes policies to combat the harmful impacts of illicit finance on communities, said, “This wrongheaded injunction is a Christmas gift to criminals who use anonymous shell companies to traffic fentanyl, exploit people, and hide dirty money."

“The law is clearly constitutional and Congress was well within its powers to pass the law to defend America and protect our financial borders. Two other federal courts have reached the opposite conclusion and denied injunctions in similar cases, so we expect the government to move to stay this outlier order promptly," Gary said.

In Mazzant's 79-page opinion and order he states that the CTA regulates companies that are registered to do business under a state’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the federal government or face severe penalties.

"Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States," Mazzant said. "Second, the CTA ends a feature of corporate formation as designed by various states—anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government.

"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," Mazzant added.

Erin Bryan, a Dorsey & Whitney partner and co-chair of its consumer financial services group, said, “While many are rightfully greeting this ruling with enthusiasm, this is not the end of the CTA or even the end of the beneficial ownership reporting requirements."

Other federal courts have considered the constitutionality of the beneficial ownership reporting requirements and reached mixed results, so the case could be headed for a showdown at the U.S. Supreme Court, Bryan said.

“Although the Texas ruling is a definite win for the industry, in some ways the court’s ruling also adds more confusion to the already murky CTA landscape. One aspect that this ruling does not address is whether newly formed entities are covered by the injunction, or if it only applies to companies that were in existence on Jan. 1, 2024. That may have been an intentional limitation by the court, or an oversight, but either way, it leaves uncertainty for the industry," Bryan said.

The plaintiffs' challenge to the law was prepared by Caleb Kruckenberg and Christian Clase of the Center for Individual Rights in Washington, D.C. Local counsel is John Clay Sullivan of SL Law in Cedar Hill.

Reprinted with permission from the December 4th edition of Texas Lawyer © 2024 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.