The case

On 3 December, a US Federal District Court in the Eastern District of Texas issued an order granting a nationwide preliminary injunction against enforcement of the Corporate Transparency Act. In observance of this ruling, FinCEN suspended application of its regulations under the Corporate Transparency Act until the order can be reviewed on appeal. Accordingly, if the order remains in place and intact, the deadline of 31 December 2024 for the disclosure of Beneficial Owner Information from any Reporting Companies that were in existence as of 1 January 2024 is stayed. However, FinCEN reportedly filed a petition for appeal to the Fifth Circuit already and, in the circumstance that the injunction order is vacated prior to 31 December, the deadline would snap back into place unless FinCEN granted the affected parties a grace period.

Source: Paul Foster Millen; Millen Tax & Legal GmbH

The commentary

The injunction issued by the judge in Top Cop Shop v. Garland differs from the earlier NSBU v. Yellen case out of Alabama in two material aspects. First, it is for a preliminary injunction. Thus, on the merits of the claim, the Texas judge did not rule that the Corporate Transparency Act was an unconstitutional exercise of congressional authority, but rather that, based on the arguments presented to him, it was likely he would find it was. To that end, he issued an injunctive order to protect the Plaintiffs from the irreparable harm that would be done them if the Act remained in effect prior to the trial over the merits of their claims. Second, the judge in Top Cop enjoined the enforcement of the Corporate Transparency Act nationwide. Unlike the Alabama decision to invalidate the Corporate Transparency Act, which was limited in the regulation’s application to the named Plaintiffs in the case, the order in Texas halted implementation of the Act in all its forms, for everyone, everywhere (pretty much), The use of nationwide injunctions – whereby a single judge blocks the enactment of a law passed by Congress or a national regulation issued by a federal agency in anticipation of invaliding it on the merits– has grown in the past decade and drawn increasing criticism for leading to improper “judge shopping” amongst other ills. Thus, presuming FinCEN filed its appeal via the emergency docket of the Fifth Circuit, that characteristic alone – the breadth of the preliminary injunction – may serve as the sole grounds for its prompt reversal. As such reversal could come swiftly, we might see this order vacated before the end of the year, leaving unaware Reporting Companies, which may have prepared but did not submit their Beneficial Owner Information disclosures, exposed to regulatory liability.

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