When page 1 of a District Court decision on a challenge on constitutional grounds to an action by a governmental entity cites Marbury v. Madison, that is not a good sign for the government agency. When page 2 of a District Court decision characterizes a federal statute as “quasi-Orwellian”, one need not be expert in constitutional law to realize the case will not end well for the government agency.
In Texas Top Shop, Inc. v. Garland, a decision rendered in the Eastern District of Texas on December 3, the District Court in question issued a nationwide preliminary injunction prohibiting enforcement of the CTA and the beneficial ownership reporting rule, which we addressed in a Law Alert (available here) discussing the forthcoming year-end obligations of reporting companies. Plaintiffs alleged three forms of constitutional violation: a First Amendment freedom of association violation; a Fourth Amendment violation of the right of privacy; and a violation of the Ninth and Tenth Amendments in that the CTA exceeded congressional powers under the Commerce Clause, the Taxing Power, and the Necessary and Proper Clause of the Constitution. The District Court decision addressed the alleged violations of the Ninth and Tenth Amendments, focusing primarily on the government’s arguments that the CTA and the beneficial ownership rule did not violate the Commerce Clause and/or the Necessary and Proper Clause of the Constitution.
We do not know what the Financial Crimes Enforcement Network (“FinCEN”) response to the District Court ruling will be, since this was not an absolute decision on the constitutionality of the CTA and the reporting rule, only a decision that there was a substantial likelihood they are unconstitutional; nor are we expressing any opinion on the correctness of the decision. This is the fourth court decision on constitutional challenges to the CTA and the beneficial ownership reporting rule, and the District Courts are split. In Virginia and Oregon, they have rejected constitutional challenges to the CTA, while an Alabama District Court, in a case now before the Eleventh Circuit, held that the CTA and reporting rule were likely unconstitutional but limited the application of its decision to the parties to the litigation.
In light of the significant penalties for non-compliance, the conservative position for those clients who have not yet completed the beneficial ownership form would be to comply with the year-end deadline, in case the Fifth Circuit stays or reverses the District Court decision. For some clients, however, there may be a downside to complying. If a client is seriously concerned about a violation of its First or Fourth Amendment rights and the decision of the Texas District Court is held to be incorrect, the client’s First and Fourth Amendment rights would have been violated, and the disclosures violating those rights could not be undone. This was one of the reasons that the Texas District Court believed the plaintiffs faced a substantial threat of irreparable harm. If you are a reporting company that has not yet filed the beneficial ownership form, please contact us if you would like to discuss your options.
