United States District Court, E.D. Texas, Sherman Division
Civil Action 4:24-CV-478
(E.D. Tex. Dec. 3, 2024)
In Texas Top Cop Shop, Inc., et al., v. Merrick Garland, Attorney General Of The United States, et al., Civil Action 4:24-CV-478 (E.D. Tex. Dec. 3, 2024), the Plaintiffs sought to “enjoin the Government from enforcing the Corporate Transparency Act and its Implementing Regulations.”
Each individual Plaintiff had not filed a beneficial ownership information report with FinCEN and refused to file such a report absent a judicial declaration that they must comply with the CTA 134 Stat. at 4604-625 (codified as amended at 31 U.S.C. § 5336). Plaintiffs contended that the CTA violated their rights under the First, Fourth, Ninth, and Tenth Amendments to the United States Constitution and should be set aside under § 706 of the Administrative Procedure Act (“APA”).
The Court stated: “Whether the CTA and the Reporting Rule are absolutely unconstitutional is a question for another day. Today, it is enough for the Court to determine whether Plaintiffs have demonstrated a substantial likelihood of success on the merits of any of their claims, in addition to satisfying the three additional elements necessary for a preliminary injunction.”
The Government argued that Congress did not exceed its authority to pass the CTA under the Commerce and the Necessary and Proper clauses
With respect to the Commerce Clause, the Court found:
a. The CTA does not regulate channels of, or instrumentalities in, commerce.
b. The CTA does not regulate an activity-it creates one.
c. Even if anonymous corporate existence and operation is an activity regulable under the Commerce Clause, the CTA fails to pass muster.
With respect to the Necessary and Proper Clause, the Court turned “to the final arrow in the Government’s quiver: the Necessary and Proper Clause-its ‘last, best hope.’” The Government argued that the Necessary and Proper Clause was supported by 1) the Commerce clause, 2) Foreign Affairs Power, and 3) Taxing Power.
With respect to the Commerce Clause the Court “easily” disposed of the Government’s argument because there is nothing in the CTA about regulating commerce stating:
“the Constitution grants Congress to ‘regulate [c]ommerce.’ NFIB v. Sebelius, 567 U.S. at 549 (quoting U.S. CONST. Art. I., § 8, cl. 3) (emphasis in original). That regulatory power presumes the existence of a prerequisite activity. Id. Just as the Government’s justification of the CTA as a raw exercise of commerce power would result in a severe expansion of Congress’s power, the Government’s logic under the Necessary and Proper Clause would justify a mandatory disclosure requirement ‘to solve almost any problem.’ See id. at 543. Requiring companies to disclose otherwise private information to the Government simply because those companies exist in their natural state does not derive from Congress’s raw commerce power.”
With respect to the Foreign Affairs Power the Court simply found: “There does not appear to be a single enumerated, foreign affairs power to which the CTA can legitimately be linked. That is fatal to the Government’s argument on this point.” See Comstock, 560 U.S. at 134. Thus, the Court must turn to the Government’s final argument that the CTA is within Congress’s enumerated powers.
With respect to the Taxing Power, the Government’s final argument was that the CTA is a valid exercise of Congress’s power to lay and collect taxes, as expanded by the Necessary and Proper Clause. “The Government wisely concede[d] that the CTA-in no way, shape, or form-is a tax.” Instead, the Government argued “that because the CTA is ‘in aid of a revenue purpose,’ that is, it helps to ‘facilitate tax collection,’ the CTA is constitutional as an exercise of Congress’s power to enact laws necessary and proper to enforce its taxing scheme.” The Court found: “The Government has not provided the Court with a single case that suggests Congress’s taxing power, even when coupled with the Necessary and Proper Clause, can be used to regulate when the statute at issue does not, in some way, generate some revenue.”
At the preliminary injunction hearing, “Plaintiffs suggested that they sought an injunction on behalf of only the Plaintiffs before the Court, including the approximately 300,000 members of NFIB. The Government responded that if the Court were to enjoin the CTA and Reporting Rule, the scope of which included NFIB’s members, then the Court would, in practical effect, enter a nationwide injunction. The Court agrees with the Government’s point. A nationwide injunction is appropriate in this case.”
The Court concluded:
“Plaintiffs have satisfied all prerequisites for a preliminary injunction. 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. 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.” (bold emphasis supplied).