The U.S. District Court of Texas, Eastern Division held that the Corporate Transparency Act is potentially unconstitutional and issued a preliminary injunction suspending the registration deadline. The Government the appealed this matter to the U.S. Court of Appeals for the Fifth Circuit. CAI filed an amicus brief in support of upholding the standing preliminary injunction.
Several small businesses and the National Federation of Independent Business (collectively, plaintiffs) filed suit against various departments of the federal government and their respective department heads including the Department of the Treasury, the Financial Crimes Enforcement Network (FinCEN), and the U.S. attorney general (collectively, the government), in an effort to prevent enforcement of the Corporate Transparency Act.
In January 2021, Congress passed the Anti-Money Laundering Act of 2020, which contained the Corporate Transparency Act. Broadly, the act was Congress’s attempt to combat the ability to hide criminal activities behind a corporate veil. It required companies to report their ownership, including personal information about their stakeholders, to the federal government or face stiff civil and criminal penalties.
In filing this lawsuit, the plaintiffs challenged the act by asserting that it is unconstitutional because it intruded on states’ rights under the Ninth and Tenth amendments of the U.S. Constitution. It also compelled speech and burdened the plaintiffs’ right of association under the First Amendment and violated the Fourth Amendment by compelling the disclosure of private information. Additionally, the plaintiffs sought a preliminary injunction (a court order that temporarily prevents or mandates certain actions until a court can make a final decision on the case) to stop enforcement of the act during the course of the lawsuit.
In order for a court to grant a preliminary injunction, the party requesting the injunction is required to establish: a substantial likelihood of success on the merits of their claims; a substantial threat that they will suffer irreparable harm without the injunction; that the threatened injury outweighs any damage that the injunction might cause to the party being enjoined; and that the injunction will not harm the public interest. Before beginning its analysis, the court stated that it would only rule on whether a preliminary injunction should be issued at this time and would not address the underlying question of constitutionality. For companies existing prior to 2024, the deadline for compliance with the Corporate Transparency Act is Dec. 31.
The court noted that complying with a regulation that is later held invalid almost always produces the irreparable harm of nonrecoverable compliance costs. To constitute irreparable harm, the compliance costs must be more than speculative. The court stated that when an alleged deprivation of a constitutional right is involved, no further showing of irreparable injury is necessary. Plaintiffs alleged that they would be harmed both ways, arguing they would be forced to expend resources and incur legal expenses to make the required filings and that the act violated their constitutional rights.
The government argued that the costs the plaintiffs would incur would be minimal and would not reach the threshold of an irreparable harm. The court disagreed, finding that while there is a minimum threshold, no specific dollar amount is required to demonstrate an irreparable harm, and the compliance costs associated with the act exceed the minimum threshold.
Second, the government argued that the plaintiffs’ allegations of constitutional violations were not sufficient to prove irreparable harm. The court found this argument also failed because absent an injunction, the plaintiffs would have to disclose information that they seek to keep private and to surrender to a law that they contend exceeds congressional powers. Since these harms cannot be undone by monetary relief, the court found these also were irreparable harms.
Turning to the plaintiffs’ likelihood of success on the merits of their claims, the court measured the act against the Constitution. Congress’s powers to enact laws are expressly delineated in the Constitution. The government asserted that the Constitution gives Congress the power to pass the act under the commerce and the necessary and proper clauses. The commerce clause grants Congress exclusive power to regulate commerce with foreign nations and among the states. The necessary and proper clause gives Congress the power to make laws necessary and proper for carrying out Congress’s enumerated powers and all other powers granted to it by the Constitution.
The court determined the commerce clause did not grant Congress the authority to pass the Corporate Transparency Act because such a determination would give Congress free rein to regulate all companies at any time simply because they might engage in commerce. It determined that the necessary and proper clause also did not grant Congress the authority to pass the act since Congress must invoke this clause in tandem with an enumerated power. While the government argued that the act would help regulate commerce, regulate foreign affairs, further national security interests, and assist with the collection of taxes, the court found each of these arguments to be insufficient. The court did not address the questions of whether the act violated the First and Fourth amendments because Congress likely did not have the authority to enact the Corporate Transparency Act and such analysis was not necessary to determine whether an injunction was permissible.
The court determined it is always in the public interest to prevent a violation of constitutional rights and it is possible that Congress passed the act without having the authority to do so. Consequently, the balance of equities favors issuing an injunction.
Accordingly, to preserve the constitutional status quo until the matter could be more thoroughly considered, the court issued a nationwide preliminary injunction that prevents the government from enforcing the act and puts a pause on the current filing deadline.
Court: United States Court of Appeals for the Fifth Circuit
Topic: Corporate Transparency Act
Brief Author: Gregg S. Weinberg, Esq., Roberts, Markel, Weinberg, Butler, Hailey, PC; Edmund Allcock, Esq., CCAL, Allcock Marcus LLC; John M. Mullen, Esq., Allcock Marcus, LLC; and Brendan Bunn, Esq., CCAL, Chadwick Washington Moriarty Elmore & Bunn PC
Filed: December 18th, 2024
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