U.S. Supreme Court lifts injunction on Transparency Act reporting

The U.S. Supreme Court has issued a stay temporarily lifting one federal judge’s nationwide injunction barring enforcement of the Corporate Transparency Act’s beneficial ownership reporting requirements.

The Supreme Court’s Jan. 21 order applies to the preliminary injunction issued by U.S. District Court Judge Amos L. Mazzant in the Eastern District of Texas in Texas Top Cop Shop, Inc. v. Garland.

“The December 5, 2024, amended order of the United States District Court for the Eastern District of Texas, case No. 4:24–cv–478, is stayed pending the disposition of the appeal in the United States Court of Appeals for the Fifth Circuit and disposition of a petition for a writ of certiorari, if such a writ is timely sought,” the Supreme Court stated in its per curiam decision.

The Supreme Court added that, should certiorari be denied, the court’s stay would terminate automatically.

“In the event certiorari is granted, the stay shall terminate upon the sending down of the judgment of this Court,” the order states.

The immediate impact of the Supreme Court’s order is unclear as on Jan. 7, another judge in the Eastern District of Texas, Judge Jeremy D. Kernodle, issued his own nationwide injunction blocking enforcement of the CTA. That order was handed down in a separate case, Smith v. U.S. Treasury.

The Supreme Court’s order is the latest in a series of on-again, off-again orders issued in Texas Top Cop Shop.

On Dec. 23, a three-judge motions panel of the 5th Circuit entered an order lifting the preliminary injunction issued by Mazzant.

On Dec. 26, the 5th Circuit reversed course. Finding it more prudent “to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments,” the court vacated the motion panel’s order.

In response to the 5th Circuit’s Dec. 23 order, the U.S. Treasury Department’s Financial Crimes Enforcement Network issued an alert that certain companies were once again required to file beneficial ownership information pursuant to the statute.

However, FinCEN also recognized that reporting companies may need additional time to comply given the period when the district court’s preliminary injunction had been in effect. Accordingly, the agency announced that certain reporting deadlines had been extended from the CTA’s original Jan. 1, 2025, deadline.

The Supreme Court’s Jan. 23 order grants an application for a stay of injunction filed Dec. 31 by U.S. Attorney General Merrick Garland. Acting U.S. Attorney James R. McHenry III has since been substituted as the petitioner in the case.

Justice Samuel A. Alito, the assigned justice for petitions emanating from the 5th Circuit, referred the government’s application for a stay to the entire court.

In a concurrence in Texas Top Cop Shop, Justice Neil M. Gorsuch wrote that he would have preferred that his colleagues take up the case immediately to “resolve definitively the question whether a district court may issue universal injunctive relief.”

In a dissent from the grant of stay, Justice Ketanji Brown Jackson cited the fact that the 5th Circuit had already expedited the government’s appeal in Texas Top Cop Shop.

The dissenting justice further wrote, “the Government deferred implementation on its own accord — setting an enforcement date of  nearly four years after Congress enacted the law —despite the fact that the harms it now says warrant our involvement were likely to occur during that period. The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts.”

The five plaintiffs in Texas Top Cop Shop allege that the CTA violated the Commerce Clause and their constitutional rights to privacy. In granting the preliminary injunction, Mazzant found the plaintiffs were likely to prevail on their Commerce Clause claims.

Enacted by Congress in 2021, the CTA is intended to assist the government in combatting money-laundering and other illicit activity by providing for the collection of “beneficial ownership” information from corporations, limited liability companies, and other entities formed under state law.

The act regulates “reporting companies,” which are defined as a “corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state,” or a foreign company registered to do business in the U.S.

Under 31 U.S.C. §5336(b)(2), reporting companies are required to submit to FinCEN a report identifying “each beneficial owner of … the reporting company … by full legal name, date of birth, current … residential or business street address, and [a] unique identifying number from an acceptable identification document or FinCEN identifier.”

With certain exceptions, §5336(a)(3)(A) defines “beneficial owner” as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity; or owns or controls not less than [25] percent of the ownership interests of the entity.”

Meanwhile, certain businesses are exempt from the act, including companies that are subject to the reporting requirements of the Securities Exchange Act of 1934 and financial institutions.

Importantly, also exempt are “large operating companies” that: (1) have 20 or more full-time employees in the U.S.; (2) have a physical operating presence in the country; and (3) in the previous year derived more than $5 million in annual gross sales from sources in the U.S.