U.S. District Judge Liles C. Burke for the Northern District of Alabama, Northeastern Division, on March 1, 2024, issued a Final Judgment ruling in favor of the Plaintiffs’ (National Small Business United, et al.  “NSBU”) motion for summary judgment, and against the U.S. Treasury (Defendants). 

This judgment held that the Corporate Transparency Act (CTA) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.

Further, FinCEN was permanently enjoined from enforcing the CTA against the Plaintiffs in that case (but only the Plaintiffs in that case). 

The U.S. Department of Justice, on March 11, 2024, filed an appeal of that ruling on behalf of U.S. Treasury to the Eleventh Circuit Court of Appeals. 

It is currently unclear as to the implications of this ruling for the business community at large. This ruling may be persuasive in similar cases brought against Treasury outside of the Northern District of Alabama, but is not precedential, meaning that other judicial forums may rule differently on the issues presented in this case. Further, the pending appeal will likely cause other potential plaintiffs to take a wait-and-see approach to filing or advancing their own actions against Treasury.

In reaching its conclusions in the Alabama case, the district court reviewed all of the arguments made by Treasury and the Plaintiffs. First, the court dispensed with Treasury’s standing argument finding that the Plaintiffs had a redressable injury and the NSBU had associational standing in order to bring the suit in federal court. Next, the court discussed the various constitutional arguments the Plaintiffs made, determining the CTA did not pass muster under the Necessary and Proper Clause (referring to foreign affairs and national security), the Commerce Clause, nor Congress’s taxing power under the Necessary and Proper Clause. The court extensively discussed Supreme Court precedent to reach the result that the CTA cannot be justified as a constitutional exercise of Congress’s powers. The Court indicated that its conclusion made it unnecessary to decide whether the CTA violates the First, Fourth, or Fifth Amendments of the Constitution, as also asserted by the Plaintiffs.

Because this case only included questions of law and was decided on summary judgment based solely on dispositive motions by the parties, the Eleventh Circuit Court of Appeals will have de novo review of this case. That is, the appeals court will decide all issues in the case as if the case was being heard for the first time. 

Because the district court indicated in its ruling that its conclusion made it unnecessary to decide on the Plaintiffs’ additional challenges to the CTA, based on claims under the First, Fourth, or Fifth Amendments of the Constitution, these additional challenges may either be sent back to the trial court for further proceedings, or, more likely, will be ruled on by the Eleventh Circuit during its de novo review.

We note that FinCEN, in response to the district court ruling, on March 4, 2024 (and updated March 11, 2024, "to reflect that a Notice of Appeal has been filed regarding this case.") has stated its position with regard to the case:

1. “FinCEN will continue to implement the Corporate Transparency Act as required by Congress while complying with the court’s order.
2. FinCEN will comply with the court’s order “for as long as it remains in effect.”
3. FinCEN is currently and will continue enforcing the CTA against all persons “other than the particular individuals and entities subject to the court’s injunction” (i.e., the plaintiffs in that case).
4. “[R]eporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”
5. “[A]t this time,” FinCEN is not requiring beneficial ownership information reporting from those members of NSBA who were members as of March 1, 2024 (i.e., future and past members of NSBA are not included in this reporting deferral).

It bears noting that this position stated by FinCEN does not extend to the beneficial owners of such members of NSBA, only to the NSBA members themselves. If a beneficial owner of a company member of NSBA is also a beneficial owner of an entity, not a member, that beneficial owner will not be excluded from the CTA’s reporting obligations through the non-member entity. Further, if an individual is such a member of NSBA, then that individual would be excluded from reporting into the FinCEN database, but not reporting companies to which that individual is a beneficial owner. This means that those reporting companies (if not an NSBA member) would remain required to report their other beneficial owners. This may be disappointing news to parties that have multiple business entities in their portfolio, where not all of those entities are members of NSBA.

Regardless of any ambiguity present through the current court proceedings, one point is clear.

Business owners and management should continue to meet any impending filing deadlines under the CTA.

Polsinelli will continue to provide summaries of further developments in the ever-evolving CTA space.