[co-author: Nathan Truong]
The court issued a permanent injunction against enforcement by the U.S. Department of the Treasury and its Financial Crimes Enforcement Network (FinCEN) of the Corporate Transparency Act (CTA) for the named plaintiffs only. All other covered entities should continue CTA analysis and Beneficial Ownership Information (BOI) reporting as usual.
On March 1, 2024, Judge Liles C. Burke of the United States District Court in the Northern District of Alabama issued a ruling that the Corporate Transparency Act (CTA)'s reporting requirements exceeded the Constitutional limits on Congress' power and lacked a sufficient nexus to any enumerated power. In granting the plaintiffs' motion for final declaratory judgment, the court rejected the U.S. Department of the Treasury's argument that the CTA was within the ambit of the Commerce, Taxing, and Necessary and Proper Clauses of the Constitution, along with Congress' foreign affairs and national security powers. Judge Burke subsequently issued a final judgment that permanently enjoined the Treasury Department and FinCEN from enforcing the CTA against the National Small Business Association (NSBA) and one of its members (plaintiffs in National Small Business United v. Yellen).
The summary judgment and injunction were drawn very narrowly and only apply to the plaintiffs in the case, as FinCEN noted in a press release. The court’s decision also does not affect potential filing requirements under similar state statutes, such as New York’s LLC Transparency Act.
While the likelihood or merits of a potential appeal or additional lawsuits challenging the CTA in other districts is beyond the scope of this note, we believe that any possible appeal will likely be complex and long in duration given the Constitutional and federalism questions that would be implicated. Additionally, Congress is not likely to pass a legislative “fix” during the remainder of its term, as doing so would require Congress to reinforce the national security and other federal jurisdictional hooks for the CTA and, overall, rethink how to enable FinCEN to build the BOI database.
In the interim, we recommend that “reporting companies” that do not qualify for an exemption under the CTA (and which are not the NSBA or its members) continue to carry on business as usual and plan on timely complying with filing deadlines and reporting requirements, including the 90-day deadline for entities formed in 2024 to report BOI.
Hogan Lovells will continue to monitor the ongoing developments regarding this decision and other CTA issues.
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