DOJ Appeals Nationwide Preliminary Injunction of the Corporate Transparency Act, Seeks Stay of Injunction During its Appeal

Background

As we discussed in our recent client alert, the U.S. District Court for the Eastern District of Texas issued an opinion and order on December 3, 2024, ("the Order") enjoining the federal government from enforcing the CTA and a rule implementing it. The rule requires certain entities formed or registered to do business in the U.S. ("reporting companies") to report information about themselves and their beneficial owners to the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the U.S. Department of the Treasury.

Since the issuance of the Order, a few notable events have occurred. 

Litigation Developments

First, on December 5, 2024, the U.S. Department of Justice (“DOJ”), on behalf of the U.S. Department of the Treasury and other federal defendants, filed a notice of appeal, indicating that it would appeal the District Court’s grant of the preliminary injunction to the U.S. Court of Appeals for the Fifth Circuit. A few days later, on December 11, 2024, the DOJ filed a Motion to Stay Preliminary Injunction Pending Appeal with the District Court, asking the Court to “stay the preliminary injunction pending a decision from the Fifth Circuit on Defendants’ appeal.” (“DOJ’s Motion”). The DOJ asked, “at a minimum,” that the District Court stay the impact of its injunction beyond the named plaintiffs or identified members of the plaintiff organizations. 

The District Court responded the next day, declining to issue a ruling without allowing the Plaintiffs a chance to respond. On December 16, 2024, the Plaintiffs filed a response opposing DOJ’s Motion. On December 17, 2024, the District Court issued an order and opinion denying the DOJ’s Motion, finding that DOJ had not met its burden of likelihood of success on the merits, and that the equities weighed against the issuance of a stay.

Separately, on December 13, 2024, the DOJ filed a parallel “Emergency Motion for Stay Pending Appeal” (“Appellate Emergency Motion”) in the Fifth Circuit. The DOJ asked the Fifth Circuit to stay the District Court’s injunction pending appeal, or in the alternative, to narrow the District Court’s injunction “to the companies that have been specifically identified in the district court or, at a minimum, to the members of” the National Federation of Independent Business. 

The DOJ further requested that the Fifth Circuit rule on the Appellate Emergency Motion “as soon as possible,” but “no later than December 27, 2024, to ensure that regulated entities can be made aware of their obligation to comply before January 1, 2025.” The Fifth Circuit ordered Plaintiffs to respond to the Appellate Emergency Motion by 5:00 PM on December 17, and for DOJ to reply by 12:00 PM on December 19.

CTA Guidance from FinCEN

Following the District Court’s issuance of a preliminary injunction, FinCEN on December 7, 2024, issued an alert entitled “Impact of Ongoing Litigation – Deadline Stay – Voluntary Submission Only” ("the Alert") on December 7, 2024. The Alert states that while the preliminary injunction is in effect, “reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so.” FinCEN says that the court’s order “stays all deadlines” of the “CTA’s reporting requirements,” indicating that FinCEN interprets the order to stay not only the January 1, 2025, deadline for reporting companies formed or registered prior to January 1, 2024, but also the 90-day deadline for all reporting companies formed or registered in 2024, and the 30-day deadline for reporting companies formed or registered in 2025 or later. FinCEN also clarifies that while companies are not currently required to report their beneficial ownership information to FinCEN, they may continue to do so voluntarily.

Implications for Reporting Companies

FinCEN has not said whether it will provide an extension to report beneficial ownership information if the injunction is stayed, overturned, or narrowed. In the Appellate Emergency Motion, the DOJ asks for the Fifth Circuit to decide the Appellate Emergency Motion by December 27, 2024, to “ensure that regulated entities can be made aware of their obligation to comply before January 1, 2025.” This leaves open the possibility that FinCEN will not provide any extension if the injunction is lifted or narrowed before that date. Accordingly, companies that have not yet reported to FinCEN may wish to prepare to comply with the reporting requirements quickly in the event that the Fifth Circuit lifts the stay and no extension (or only a short extension) is granted. As part of that preparation, reporting companies may want to make sure they understand what information must be reported to FinCEN, identify those individuals that must be reported as beneficial owners, collect all necessary information (including required personal identifying information about beneficial owners), and prepare the required report.

Crowell & Moring will continue to monitor the status of these proceedings and any further FinCEN announcements, and will provide updates as appropriate.