William McCracken in Legal/Financial
The Corporate Transparency Act (CTA), the new disclosure law that, as detailed in Habitat Magazine’s March 2024 cover story, threatens to upend corporate governance practices for millions of entities, has itself been upended. At least, that is one possible outcome of the surprising — and surprisingly sweeping — decision from the Northern District of Alabama in March declaring the CTA to be unconstitutional. As of now, this decision does not affect the enforceability of the CTA for anyone but the plaintiffs in that case, but it adds to the uncertainty that observers feel about the scope of the law.
The CTA is a new federal law enacted to curtail money laundering and deter fraud by requiring the disclosure to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) of the individual beneficial owners of most corporations, limited liability companies, and limited partnerships. The disclosure requirements apply to residential co-ops and their directors, as co-ops are technically corporations, but it is somewhat of an open question whether the CTA requires disclosure by condominiums in New York.
Until recently, co-ops and condominiums were awaiting more specific guidance from FinCEN, or perhaps legislative relief from Congress, as to how (or to what extent) co-ops and condos would need to comply with the CTA. That was until March 1, 2024, when a district court judge in Alabama issued an opinion declaring that the entire CTA is unconstitutional. The case at issue is captioned National Small Business United, d/b/a the National Small Business Association, et al. v. Yellen, et al., which was filed by the National Small Business Association (NSBA) and a small business owner (also a member of NSBA) challenging the constitutionality of the CTA’s Beneficial Ownership Information (BOI) reporting rule. According to the plaintiffs’ attorneys, NSBA was the only organization to file such a challenge to the CTA at the time it was enacted.
The plaintiffs alleged, among other things, that the BOI rule violates privacy protections, would be unduly burdensome, and would unduly infringe on states’ powers to govern business. In response, the government argued that the CTA was constitutionally justified by Congress’s powers (a) to oversee foreign affairs and national security, (b) to regulate commerce, and (c) to impose taxes and related regulations.
The district court, however, rejected all of these arguments and concluded that (a) the CTA is an unjustified extension of federal police resources into an area generally governed by state law, (b) the connection between incorporation and criminal activity is “too attenuated” to involve the Commerce Clause, and (c) the argument that the collection of BOI from reporting companies is necessary and proper to ensure the accuracy of taxable income reporting is “not enough” to justify the expansion of federal power. No matter how “sensible and praiseworthy” Congress’s aims were in enacting the CTA, it simply acted beyond its constitutional power to legislate.
At least, that is, according to Judge Liles C. Burke of the Northern District of Alabama. But where does that leave all of us here in New York? The immediate question raised by the court’s decision is whether the CTA is in effect. The answer to this question appears to be yes, except for the named plaintiffs in the case. The court’s order only enjoins enforcement of the CTA against the NSBA plaintiffs, and FinCEN issued a notice pointedly limiting the scope of its response to the decision to those same plaintiffs.
Thus, as of now, the CTA seems to still be enforceable against everyone else. Moreover, the government is sure to swiftly file an appeal challenging Judge Burke’s decision, and will likely seek a stay of the order pending that appeal. On the other hand, there will undoubtedly be scores of copycat suits filed in the coming weeks (if not already), and there is uncertainty as to how the U.S. Supreme Court might ultimately decide the case.
The bottom line is that with the issuance of the NSBA decision, board members struggling with how best to comply with the CTA now must wonder whether anyone will have to comply with the law at all.