On December 23, 2024, the Fifth Circuit Court of Appeals (the “Court”), in response to an emergency appeal by the Department of the Treasury and its Financial Crimes Enforcement Network (“FinCEN”), temporarily lifted a nationwide preliminary injunction issued on December 3rd by the District Court for the Eastern District of Texas in Top Shop, Inc. v. Garland, against the enforcement of the Corporate Transparency Act (“CTA”), pending a ruling on the merits of the appeal. The Texas court’s ruling (about which we wrote in a previous Law Alert, available here) had enjoined the enforcement of the CTA’s provision obliging certain nonexempt companies to report, by January 1, 2025, the identity of their beneficial owners and applicants for incorporation, finding the provision unconstitutional.
In its ruling, the Court cited the government’s demonstration of a strong likelihood of success on appeal based on the merits in defending the CTA’s constitutionality, and found that it had satisfied the factors under Nken v. Holder, 556 U.S. 418 (2009), to allow for a temporary stay of the district court’s order and injunction pending appeal. The Court noted the historically broad application of the Commerce Clause as the basis for concluding that the CTA’s reporting requirement is constitutional. Furthermore, the Court rejected the Plaintiffs’ argument that the ruling in Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, that the Affordable Care Act’s health insurance mandate was unconstitutional, applies to the case at hand, noting the Supreme Court’s conclusion in that case was that “Congress was attempting to regulate individuals ‘whose commercial inactivity rather than activity is [their] defining feature’” – not so, the Court stated, in the case of the CTA.
The Court also indicated that the government had shown a strong likelihood of overcoming the Plaintiffs’ facial challenge to the CTA, noting that the mere showing of the hypothetical possibility that some circumstance may exist in which a congressional act may be unconstitutional is not enough to render such act unconstitutional. In addition, in lifting the injunction, the Court found that barring enforcement of the CTA, a “statute proposed and passed by the people’s representatives[,] necessarily inflicts irreparable harm.”
Finally, the Court weighed the harm that might result from preventing enforcement of the CTA against the harm that the parties to the suit might suffer if the injunction was lifted, and found that the government had demonstrated that the harm from the former would be greater. The Court noted that FinCEN provided an estimate that a typical business will spend approximately 90 minutes (or $85 worth of time) to complete and file (for free) the required report under the CTA, and that the Plaintiffs did not contend otherwise. The Court concluded, therefore, that in balancing that burden against “the public’s urgent interest in combatting financial crime and protecting our country’s national security, equity favors a stay.”
It is also worth mentioning that the Court seemed to admonish the district court for having concluded that both the CTA and the reporting requirement thereunder are unconstitutional and issuing a nationwide injunction against each, even though no party to the case had requested such relief and despite no other court considering the matter having done so. The Court noted that other courts ruling on the matter either issued relief tailored to the complaining parties or denied any relief at all.
As a result of this ruling, covered businesses registered before January 1, 2024, now have until January 13, 2025, to file their initial beneficial ownership information (“BOI”) reports with FinCEN.
