Nationwide preliminary injunction suspends enforcement of the Corporate Transparency Act

On December 3, 2024, the United States District Court for the Eastern District of Texas, Sherman Division, issued a preliminary injunction prohibiting the federal government from enforcing the Corporate Transparency Act (CTA) on a nationwide basis. 

The case, Texas Top Cop Shop, Inc., et al. v. Garland, et al., Case No. 4:24-cv-478 (E.D. Tex.), was brought by six plaintiffs – one individual, three privately owned small businesses, a political organization and an association representing approximately 300,000 members comprising small businesses. The court preliminarily enjoined enforcement of the CTA and its reporting requirements on a nationwide basis. The court found that the plaintiffs successfully demonstrated that the CTA is likely unconstitutional as outside of Congress’s power and that its implementation would irreparably harm reporting companies if they were forced to comply. It is important to note that this decision is not a full and final ruling on the merits of the case, but temporarily halts enforcement of the CTA while the case proceeds. 

Part of the Court's order reads as follows:

At page 77:  "The Court determines that the injunction should apply nationwide. Both the CTA and the Reporting Rule apply nationwide, to “approximately 32.6 million existing reporting companies.” See 87 Fed. Reg. at 59585. NFIB’s membership extends across the country. And, as the Government states, the Court cannot provide Plaintiffs with meaningful relief without, in effect, enjoining the CTA and Reporting Rule nationwide. The extent of the constitutional violation Plaintiffs have shown is best served through a nationwide injunction. See Califano, 442 U.S. at 705; Career Colls. & Schs. of Tex., 98 F.4th at 256. Given the extent of the violation, the injunction should apply nationwide.

"Plaintiffs also urge the Court to enjoin the Reporting Rule under § 706 of the APA (Dkt. #6 at p. 28), which instructs courts to “hold unlawful and set aside agency action . . . found to be . . .contrary to constitutional right[s].” 5 U.S.C. § 706(2)(B). Such vacatur is the “default rule in this Circuit.” Cargill v. Garland, 57 F.4th 447, 472 (5th Cir. 2023).10 But § 706 is not the proper vehicle to protect Plaintiffs from irreparable harm at this juncture. The Court has determined that the CTA and Reporting Rule are likely unconstitutional for purposes of a preliminary injunction. It has not made an affirmative finding that the CTA and Reporting Rule are contrary to law or that they amount to a violation of the Constitution. Thus, the Court determines that the Government should be enjoined from enforcing the Reporting Rule and the January 1, 2025, compliance deadline under the Reporting Rule should be stayed under § 705 of the APA.

At page 78:  CONCLUSION - "Plaintiffs have satisfied all prerequisites for a preliminary injunction. The Court has authority to issue the injunction Plaintiffs seek under Federal Rule of Civil Procedure 65(d). The CTA is likely unconstitutional as outside of Congress’s power. Because the Reporting Rule implements the CTA, it is likely unconstitutional for the same reasons. The Court has not addressed the issue of the CTA’s constitutionality as applied to these Plaintiffs or Plaintiffs’ challenges under the First and Fourth Amendments. Having determined that Plaintiffs have carried their burden, the Court GRANTS Plaintiff’s Motion for a Preliminary Injunction. Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.

"Federal Rule of Civil Procedure 65(c) provides that “[t]he court may issue a preliminary injunction . . . only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.” FED. R. CIV. P. 65(c). The Fifth Circuit has held that district courts have discretion to “require no security at all.” Kaepa, Inc. v. Achilles Corp., 76 F.3d 624, 628 (5th Cir. 1996). After considering the facts and circumstances of this case, the Court finds that security is unnecessary and exercises its discretion to not require Plaintiffs to post security.

"It is therefore ORDERED that Plaintiffs’ Motion for Preliminary Injunction (Dkt. #6) is hereby GRANTED

The nationwide application of the injunction without a decision on the merits presents a quandary for companies who have not yet made CTA filings that would otherwise be required to make filings by January 1, 2025. The government may move quickly to ask a federal appellate court to stay, vacate, or limit the trial court’s preliminary injunction. As a result, the appellate court could potentially issue a stay, vacatur, or limitation of the injunction later this month, leaving a very short window for meeting any compliance deadline occurring on or before January 1, 2025. However, as long as the Texas trial court’s preliminary injunction remains in effect and unchanged, there is no requirement to make any CTA filings.

Given these uncertainties, companies should consider proceeding gathering the necessary information to file promptly if the preliminary injunction does not remain in effect through the end of the year. It is imperative that affected companies continue to monitor developments with respect to this court decision.