Texas court halts CTA in another lawsuit

A federal court in Texas has issued another preliminary injunction and stay halting enforcement of the Corporate Transparency Act and its beneficial ownership information reporting requirement, which were already on hold following a recent reversal by a federal appeals court.

The U.S. District Court for the Eastern District of Texas, Tyler Division, issued the preliminary injunction and nationwide stay yesterday. The same district court's Sherman Division had issued an earlier injunction last month in the case of Texas Top Cop Shop v. Garland. A panel of judges on a federal appeals court temporarily lifted the injunction late last month, but another panel of judges on the same court reinstated it only days later. The Justice Department filed an emergency request last week with the U.S. Supreme Court to lift the injunction.

The decision on Tuesday involved a case with a pair of plaintiffs, Samantha Smith and Robert Means, suing the U.S. Treasury Department. They had formed LLCs under Texas law to hold real property in the state. In an opinion, Judge Jeremy Kernodle held the law likely exceeds federal authority, finding that the government's theory of government power was "unlimited" and its actions were probably unconstitutional.

"The Corporate Transparency Act is unprecedented in its breadth and expands federal power beyond constitutional limits," he wrote. "It mandates the disclosure of personal information from millions of private entities while intruding on an area of traditional state concern."

He noted that the LLCs do not buy, sell or trade goods or services in interstate commerce or own any interstate or foreign assets. 

The CTA passed as part of the National Defense Authorization Act in 2021 and requires businesses to disclose their true owners as a way to deter shell companies from carrying out illicit activities such as money laundering, terrorist financing, human trafficking and tax fraud. Businesses are required to file beneficiai ownership information reports with the Treasury Department's Financial Crimes Enforcement Network. FinCEN has since announced that companies are not currently required to file BOI reports with FinCEN and are not subject to liability if they fail to do so while the court order remains in force. However, they can continue to voluntarily submit BOI reports. New businesses began filing the reports when the CTA took effect on Jan. 1, 2024, but existing businesses weren't supposed to be subject to the requirement until Jan. 1, 2025. However, that requirement is currently on hold. An earlier decision in a separate lawsuit had exempted members of the National Small Business Association from the requirement.

The Texas Public Policy Foundation is representing the two property owners challenging the CTA, arguing that the law violates federal Commerce Clause powers under the Constitution and undermines the principles of limited government and individual liberty. 

"The court's decision affirms the principle that federal government power is not unlimited," said TPPF general counsel Robert Henneke in a statement Wednesday. "This ruling is a powerful reminder that our Constitution limits federal power to protect individual rights and economic freedom."

"The government's theory of power in this case was effectively unlimited," said Chance Weldon, director of the Center for the American Future at TPPF, in a statement. "The district court's opinion is not only a win for our clients, but ordinary Americans everywhere."