The Fifth Circuit Grants Stay on the Corporate Transparency Act Injunction

On December 23, 2024, the United States Court of Appeals for the Fifth Circuit granted the Government’s Motion to Stay Pending Appeal Texas Top Cop Shop, Inc., et al. v. Merrick Garland, et al., effectively reinstating the Corporate Transparency Act (CTA) and its Reporting Rule. This Act mandates specific businesses to disclose the identities of their beneficial owners, aiming to address financial crimes such as money laundering and tax fraud. The appellate court’s decision temporarily stayed a lower court’s nationwide injunction, ensuring the Act’s enforcement pending further review.

Background of the Case

The Corporate Transparency Act, passed in 2021, is a bipartisan measure designed to close critical gaps in financial transparency. It requires certain entities to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) by January 1, 2025. The Act’s primary goal is to enhance the federal government’s ability to combat illicit financial activities while protecting national security.

On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a preliminary injunction sought by the plaintiffs, a coalition of businesses and organizations. The district court declared the CTA and its associated reporting rules unconstitutional, issuing a nationwide injunction that halted its enforcement. The government filed an emergency motion for a stay with the Fifth Circuit, arguing the necessity of the CTA’s implementation to safeguard critical public interests.

The Fifth Circuit’s Decision

The Fifth Circuit’s per curiam opinion granted the government’s request for a temporary stay of the district court’s injunction. The appellate court applied the four-factor test established in Nken v. Holder to evaluate whether a stay was appropriate:

1. Likelihood of Success on the Merits: The Court determined that the Government is highly likely to succeed in defending the CTA’s constitutionality. Congress, according to the court, exercised its Commerce Clause authority appropriately, as the Act regulates economic activities that significantly impact interstate commerce. The court also emphasized the CTA’s narrow exemptions, which spare entities uninvolved in economic activities from reporting obligations.
2. Irreparable Harm to the Government: The Court emphasized that enjoining a duly enacted federal statute inflicts irreparable harm, particularly when the statute addresses urgent national security and law enforcement concerns.
3. Potential Harm to Plaintiffs: The Court concluded that the reporting requirements imposed only a minimal burden on businesses. FinCEN estimated that most businesses could complete the required disclosure in about 90 minutes at a nominal cost. The Plaintiffs failed to present evidence of any substantial financial or operational harm.
4. Public Interest: The Court underscored the significant public interest in implementing the CTA to combat financial crimes and enhance national security. Delaying the Act’s enforcement would jeopardize efforts to address longstanding vulnerabilities in the U.S. financial system.

Fifth Circuit Questions Overreach of Nationwide Injunctions

The Fifth Circuit’s decision also addressed the scope of the district court’s injunction. Nationwide injunctions have been a contentious issue in federal litigation, and the appellate court expressed skepticism about their appropriateness in this context. Judge Haynes, concurring in part, agreed that a nationwide injunction was overbroad and supported a temporary stay while deferring certain aspects to the merits panel.

The Upcoming Appeal

The Fifth Circuit expedited the appeal, signaling the importance of resolving the case swiftly. Oral arguments are anticipated in early 2025, with a decision on the merits to follow. In the interim, businesses subject to the CTA must meet the January 1, 2025, reporting deadline.

Key Implications for Our Clients

1. For Clients Who Have Already Filed:

No immediate action is needed, but clients should monitor and update Beneficial Ownership Information as ownership information changes occur.

1. For Clients Who Have Not Filed:

With the January 1, 2025, deadline fast approaching, businesses subject to the CTA must submit their Beneficial Ownership Reports to avoid civil and criminal penalties for noncompliance. On December 17, 2024, the House of Representatives introduced a bill to fund the government and prevent a shutdown slated for December 20, 2024. The bill initially included a provision to extend the CTA compliance deadline to January 1, 2026. However, when President Biden signed the final version of the bill, titled the “American Relief Act, 2025,” on December 20, 2024, this provision was removed, leaving the January 1, 2025, deadline unchanged.

Next Steps

CCM will continue monitoring developments and provide updates as the case progresses. For additional resources, visit the CCM CTA Resource Library.