Business Vantage Point Blog

On March 1, 2024, Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama, in National Small Business United v. Yellen (NSBU), ruled that the CTA exceeded constitutional limitations on congressional powers (see our previous article for more in-depth analysis on this case). The government appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit, where it is being reviewed on an expedited basis. It is anticipated that the case may go on further to the U.S. Supreme Court, based on constitutional arguments raised in the matter.

Status of the NSBU Appeal (in the context of the Corporate Transparency Act).

On March 11, the government appealed the ruling in NSBU to the Eleventh Circuit. The court has granted expedited appeal, and briefing is set to be concluded by June 3, with arguments to be held on the first available argument calendar vacancy after that date.¹

The appellant’s brief addresses the reasoning used by the District Court, which, as we have discussed previously, did not address the strongest constitutional arguments against the CTA. It could be anticipated that appellees will raise additional arguments in the alternative, which were ignored in the District Court’s decision.

Ultimately, the Eleventh Circuit has four potential choices as to how to proceed with the NSBU appeal:

• Affirm the District Court’s opinion;
• Affirm the ruling based on alternative grounds raised in the appeal process;
• Reverse the decision, after taking alternative grounds into account; or
• Vacate the ruling, and remand for consideration of the alternative grounds raised on appeal.

A crucial unknown factor remains: the identities of the judges who will be assigned to the appellate panel. Knowing their backgrounds will be vital in assessing the likely outcome of the case. While the order granting expedited status was signed by Judge Robin Rosenbaum, an Obama appointee, Judge Rosenbaum served only as a motions judge with respect to this matter. The composition of the hearing panel will presumably be determined by availability.

Other Legal Challenges to the Corporate Transparency Act.

While the ruling in the NSBU decision was limited to the plaintiffs in that case, two new key suits have been filed in other states that similarly challenge the constitutionality of the CTA: (1) Boyle v. Yellen in Maine; and (2) Small Business Association of Michigan v. Yellen in Michigan. These post-NSBU cases are in addition to Robert J. Gargasz Co. v. Yellen, which was filed in the U.S. District Court for the Northern District of Ohio on December 29, 2023.

Maine — Boyle v. Yellen

On March 15, 2024, William Boyle, a beneficial owner with reporting obligations triggered by the CTA, brought an action in the U.S. District Court for the District of Maine, challenging the constitutionality of the CTA as an “encroachment on the sovereignty of the State of Maine to regulate entity formation.”²

Boyle’s argument centers on the concept that the U.S. Constitution does not grant the federal government, including Congress and the Treasury Department, the authority to dictate the terms under which companies are chartered. Similar to the NSBU decision in Alabama, plaintiff Boyle puts forward the argument that the CTA’s broad language captures entities that are primarily holding companies that may not be engaged in foreign, interstate, or Indian commerce.

Additionally, Boyle argues that the penalties imposed by the CTA were outside of Congress’s authority, as they did not constitute a tax. The Alabama court in NSBU rejected the idea that the CTA’s penalties constituted a tax, so it remains to be seen if we can expect similar treatment from the District of Maine.

Michigan — Small Business Association of Michigan v. Yellen

On March 26, 2024, the Small Business Association of Michigan, along with the Chaldean American Chamber of Commerce and several other plaintiffs, filed suit in the U.S. District Court for the Western District of Michigan challenging the CTA on three constitutional grounds:

• Commerce Clause. Plaintiffs argue that merely because an entity has been formed under state or tribal law, this does not necessarily mean that such entity has been engaged in any sort of commerce — interstate or otherwise. Plaintiffs argue that the Commerce Clause does not permit Congress to regulate entities solely by reason of their existence.
• Fourth Amendment privacy rights. Plaintiffs argue that the CTA is predominantly a tool to be utilized by law enforcement against crime (white collar or otherwise), and the reporting requirements oblige beneficial owners to provide sensitive information to federal law enforcement agencies that may be shared with domestic or foreign law enforcement. Plaintiffs note that no court oversight is required for any of the processes required under the CTA, and argue that the Fourth Amendment does not allow warrantless, suspicionless searches of American citizens or companies.
• Constitutional vagueness. Plaintiffs argue that the CTA’s definition of “beneficial owner” is unconstitutionally vague, and too indefinite for ordinary people to know precisely when they are required to report an interest or not.³
• The plaintiffs sought a preliminary injunction against enforcement of the CTA against them while the case is pending. The court has denied the motion for a preliminary injunction and has ordered briefing to be concluded by July 26, as proposed by the parties.⁴

Ohio — Robert J. Gargasz Co. v. Secretary of the Treasury

In this case, which was pending prior to the decision in NSBU, the court has granted the defendants’ motion to hold the case in abeyance pending the outcome of the appeal to the Eleventh Circuit.⁵

Proceedings in the Maine and Michigan cases are ongoing. Regardless of the outcome of these two cases, however, ultimately the Supreme Court is likely to have the final say on the CTA’s fate. This is especially true if lower courts disagree and Congress does not amend the law.

What Can Businesses Expect for Now?

Businesses should expect the Financial Crimes Enforcement Network (FinCEN) to maintain its current stance that the CTA applies broadly, absent a specific court ruling, and that reporting obligations continue to be enforceable. Save any action by Congress or the Supreme Court, entities created prior to January 1, 2024, are expected to have provided reporting information on beneficial owners by January 1, 2025, and entities created in 2024 are expected to file similar reports within 90 days after formation.

Members of Stradley Ronon’s CTA Task Force — a multidisciplinary team established to provide guidance on all facets of the CTA — will continue to monitor these developments and are available to assist clients with any questions that may arise.

¹  National Small Business United v. U.S. Dep’t of the Treasury, No. 24-10736 (11^th Cir. Apr. 22, 2024).

²  Complaint, Boyle v. Yellen, No. 2:24-cv-00081-LEW (D. Me. Mar. 15, 2024).

³ Verified Complaint, Small Business Ass’n of Mich. v. Yellen, No. 1:24-cv-00314-RJJ-SJB (W.D. Mich. Mar. 26, 2024).

⁴  Small Business Ass’n of Mich. v. Yellen, No. 1:24-cv-00314-RJJ-SJB (W.D. Mich. Apr. 26, 2024).

⁵  Robert J. Gargasz Co. v. Secretary of the Treasury, No. 1:23-cv-02468-CEF (N.D. Ohio Apr. 17, 2024).