chevron-down Created with Sketch Beta.
    December 30, 2024

    Fifth Circuit Reinstates Nationwide Injunction Blocking Enforcement of CTA, Congress Fails to Approve One-Year Filing Extension

    The Corporate Transparency Act requires millions of small businesses to report their beneficial ownership information to the Treasury Department.

    The Corporate Transparency Act requires millions of small businesses to report their beneficial ownership information to the Treasury Department.

    Millions of small businesses—and their lawyers—were again relieved of the fast-approaching January deadline to submit the companies’ beneficial ownership information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (CTA) when the Fifth Circuit issued a new order on December 26 reinstating an earlier nationwide injunction that had suspended those requirements indefinitely before a Fifth Circuit panel briefly lifted the injunction on December 23.

    The CTA and its implementing regulations require more than 32 million small businesses and other entities in the U.S. (known as “reporting companies”) to file reports with FinCEN identifying their “beneficial owners” to help the agency combat money laundering. Beneficial owners are defined as the individuals who directly or indirectly own or control the company. Willful failure by companies to file their initial beneficial ownership reports by the original January 1, 2025 deadline (recently extended by FinCEN to January 13 before the Fifth Circuit’s latest ruling)—or willfully filing false or fraudulent information—can result in a $500 per day civil penalty, up to $10,000 in fines, and two years in federal prison.

    On December 3, the U.S. District Court for the Eastern District of Texas issued a sweeping nationwide preliminary injunction in Texas Top Cop Shop v. Garland et al., No. 4:24-cv-478 (E.D. Tex. Dec 3, 2024) that temporarily blocked the enforcement of the CTA and its implementing regulations. After concluding that Congress exceeded its constitutional authority under the Commerce Clause and the Necessary and Proper Clause when it enacted the CTA, the district court enjoined the enforcement of the Act and its regulations, stayed the original January 1, 2025 reporting deadline, and declared that reporting companies need not comply with that deadline “pending further order of the Court.”

    The district court’s nationwide injunction proved to be short-lived, however, when a three judge motions panel of the Fifth Circuit Court of Appeals issued an order on December 23 granting the government’s emergency motion for a stay pending appeal, lifting the injunction, and expediting the appeal “to the next available oral argument panel.” In the order, the Fifth Circuit panel concluded that the government “made a strong showing that it is likely to succeed on the merits in defending [the] CTA’s constitutionality” because in the panel’s view, Congress acted within its powers under the Commerce Clause in enacting the CTA.

    Hours after the Fifth Circuit panel stayed the injunction, FinCEN posted an Alert on its website extending the filing deadline for reporting companies formed or registered before January 1, 2024 from the original January 1, 2025 deadline to a new January 13, 2025 deadline. The FinCEN Alert also granted various deadline extensions for certain other special categories of reporting companies.

    The Fifth Circuit panel’s order lifting the nationwide injunction and FinCEN’s new January 13 filing deadline also proved to be transitory, however. On December 26, the Fifth Circuit issued a new order vacating the motions panel’s stay and temporarily reinstating the nationwide injunction “in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments” on an expedited basis. The next day, the court also ordered the parties to file their briefs in February and set oral argument for March 25.

    Shortly after the new Fifth Circuit ruling, FinCEN posted an updated Alert noting that although “reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force,” those companies “may continue to voluntarily submit beneficial ownership information reports.”

    Several other federal district courts around the country have also ruled on the constitutionality of the CTA in recent months, with mixed results. In National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. Mar. 1, 2024), an Alabama district court ruled that the CTA is unconstitutional and enjoined FinCEN from enforcing the Act against the plaintiffs. By contrast, federal district courts in Oregon (Firestone v. Yellen, No. 3:24-cv-1034 (D. Or. Sept. 20, 2024)) and Virginia (Community Associations Institute v. Yellen, No. 24-cv-01597 (E.D. Va. Oct. 24, 2024)) denied the plaintiffs’ requests for preliminary injunctions after concluding that Congress likely did not exceed its powers in enacting the CTA. These three district court rulings are currently on appeal to the Eleventh, Ninth, and Fourth Circuits, respectively.

    Meanwhile, congressional leaders tried—but were unable—to pass important ABA-supported legislation in mid-December that would have extended the CTA initial report filing deadline for all 32 million reporting companies formed or registered prior to 2024 until January 1, 2026.

    After the ABA and its allies raised concerns about the widespread lack of awareness in the small business and legal communities regarding the upcoming CTA filing requirements and the need for an extension to conduct additional education and outreach, House and Senate leaders agreed to add the requested language to their massive Continuing Resolution (CR) stopgap spending bill that would have funded the federal government through March 14. But after President-elect Trump issued a statement on December 18 opposing numerous provisions in the CR (unrelated to the CTA deadline extension language), House Republicans pulled the bill and introduced a much shorter measure that did not include the CTA-related provision.

    The House and Senate finally passed a slimmed down CR, and President Biden signed it into law on December 21, just in time to avert a government shutdown. Because the CTA deadline extension language was not included in the final CR, the ABA and its allies will continue to urge House and Senate leaders to enact that provision on an expedited basis early in the 119th Congress.

    Although Congress failed to include the CTA extension provision in the final CR and the ultimate fate of the four pending federal court appeals remains uncertain, reporting companies are not required to file their initial beneficial ownership reports with FinCEN—or update any previous filings—so long as the district court’s broad nationwide preliminary injunction just reinstated by the Fifth Circuit remains in place.

    However, if the Fifth Circuit or the Supreme Court lift or modify the nationwide injunction, some or all reporting companies could be required to file their initial or updated beneficial ownership reports under the applicable CTA deadlines—possibly on short notice—depending on the details and scope of those courts’ rulings.

    Follow us @ABAGrassroots on X to learn about significant developments when they happen.

    Topic:
    The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.