Federal Court Issues Injunction On CTA Reporting Requirements
December 5, 2024
By: Ryan P. Mahoney
On December 3, 2024, the United States District Court for the Eastern District of Texas granted a preliminary injunction in Texas Top Cop Shop, Inc., et al. v. Merrick Garland, Attorney General of the United States, et al., No. 4:24-CV-478 (E.D. Tex. filed Dec. 3, 2024) (“Texas Top Cop Ruling”) which enjoined the enforcement of the Corporate Transparency Act (31 U.S.C. § 5336) (the “CTA”) and the CTA’s related reporting rule (31 C.F.R. 1010.380) (the “Reporting Rule”). The Court stayed the requirement for reporting companies to file beneficial ownership reports under 31 U.S.C. § 5336(b)(2), which included the requirement for reporting companies formed before January 1, 2024 to file their report by January 1, 2025.
It seems likely that the US Department of Justice (the “DOJ”) will appeal the Court’s ruling, which may include a request to stay the injunction or narrow its application. A previous ruling on March 1, 2024 by the U.S. District Court for the Northern District of Alabama had found the CTA unconstitutional and enjoined the Reporting Rule only as to the Plaintiffs in that case (Nat’l Small Business United v. Yellen, 721 F. Supp. 3d 1260 (N.D. Ala. 2024). It is possible that the DOJ will seek a similar narrowing of the Texas Top Cop Ruling.
The Texas Top Cop Ruling does not take an overt position on whether any aspect of the CTA is unconstitutional—only that the Reporting Rule should not be enforced while the court challenge is pending because the challengers have met their burden of showing that they are likely to succeed.
While clients may react by pausing their filings because of the Texas Top Cop Ruling, we recommend that clients nonetheless prepare to comply with the requirements of the CTA and the Reporting Rule to be able to file on short notice, or proceed in completing their planned filings by the January 1, 2025 deadline for applicable reporting companies. It is possible that the proceedings surrounding the CTA will ultimately reach the United States Supreme Court, and definitive answer on the constitutionality of the CTA may not be forthcoming for a long period of time.