On Dec. 3, 2024, the United States District Court for the Eastern District of Texas (“Court,” Sherman Division) in the case of TEXAS TOP COP SHOP, INC., ET AL., Plaintiffs, v. MERRICK GARLAND, ATTORNEY GENERAL OF THE UNITED STATES, ET AL., Defendants, granted a nationwide preliminary injunction with respect to Corporate Transparency Act (“CTA”). The Court enjoined the CTA and also enjoined the enforcement of the Reporting Rule under the CTA stating that “[n]either may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI (Beneficial Ownership Information) reporting deadline pending further order of the Court.”

As background, the Plaintiffs asserted that the CTA is unconstitutional both facially and as applied because:

1. the CTA intrudes upon States’ rights under the Ninth and Tenth Amendments;
2. the CTA compels speech and burdens Plaintiffs’ right of association under the First Amendment; and
3. the CTA violates the Fourth Amendment by compelling disclosure of private information.

The Plaintiffs also asserted that FinCEN’s Reporting Rule, which implements the CTA, is unconstitutional and should be set aside under the Administrative Procedure Act. The Court stated that “whether the CTA and the Reporting Rule are absolutely unconstitutional is a question for another day. Today, it is enough for the Court to determine whether Plaintiffs have demonstrated a substantial likelihood of success on the merits of any of their claims.”

After conducting an analysis of the arguments, the Court concluded that

1. the Plaintiffs have satisfied all prerequisites for a preliminary injunction;
2. the Court has authority to issue the injunction Plaintiffs seek under Federal Rule of Civil Procedure 65(d);
3. the CTA is likely unconstitutional as outside of Congress’s power; and
4. because the Reporting Rule implements the CTA, it is likely unconstitutional for the same reasons.

The Court further stated that it has not addressed the issue of the CTA’s constitutionality as applied to these Plaintiffs or Plaintiffs’ challenges under the First and Fourth Amendments but having determined that Plaintiffs have carried their burden, the Court granted Plaintiff’s Motion for a Preliminary Injunction.

What will happen next, when and by whom are questions to which there are not yet clear answers. In our guidance memorandum that we previously furnished to clients; we stated that there are court challenges to the CTA. Although the Texas Court decisions has served to “muddy the waters” reporting companies should continue to be prepared to comply with the CTA until and unless the CTA is overturned.