Civil Practice: Court refuses to enjoin Corporate Transparency Act

Where various community associations moved to enjoin enforcement of the Corporate Transparency Act, but they did not show a likelihood of success on the merits or irreparable harm if an injunction were denied, their motion was denied.

Background

Plaintiffs are comprised of an organization that represents various community associations, or CAs, across the United States, along with several such associations. They filed this action seeking injunctive and declaratory relief to prevent enforcement of the Corporate Transparency Act, or CTA, against CAs by the Department of the Treasury.

This matter comes before the court on plaintiffs’ motion for a preliminary injunction.

Likelihood of success

Plaintiffs first argue they fall under the exception to the definition of “reporting companies” for nonprofit organizations. But CAs like plaintiffs are not included among those organizations “described in section 501(c).”

Stuck with this reality, plaintiffs argue that § 528(a), where Congress provided that a “homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes,” means that the reference to exempt organizations in the CTA should be read to include plaintiffs. That is, the CTA is “any law,” and it “refers to organizations exempt from income taxes,” and so CAs should “be considered an organization exempt from income taxes for the purpose of” the CTA.

This argument cannot be squared with the CTA’s plain meaning, which controls here. Plaintiffs are thus not likely to succeed on the merits of their claim that the statutory exemptions in the CTA relieve CAs of the obligation to report beneficial ownership information.

Next, plaintiffs argue that FinCEN’s “FAQs,” which determined that CAs “may fall within the reporting company definition” and outlined the individuals who may be the “beneficial owner” of a CA, violated the APA’s notice-and-comment rulemaking requirements or, in the alternative, were arbitrary and capricious. This argument cannot succeed because plaintiffs do not challenge a final agency action.

Plaintiffs also ask this court to follow the lead of the Northern District of Alabama, which found that the CTA “exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary and proper means of achieving Congress’ policy goals.” This court respectfully disagrees and finds plaintiffs are unlikely to be able to show that Congress overstepped the outer bounds of its commerce power when it enacted the CTA.

Plaintiffs next argue that the CTA violates their First Amendment rights because it impermissibly compels Board members’ speech and chills their right to freely associate. But the compelled speech doctrine typically only applies when the government requires an individual to convey a “particular message” publicly. And the CTA does not require the public disclosure of information. The CTA therefore does not violate the compelled-speech doctrine. In any event, the CTA’s requirements are neither an unjustified nor unduly burdensome way for the CTA to “strengthen the government’s ability to detect and prosecute financial crime.”

Plaintiffs contend that their “free association rights are also violated because, as they have attested, they will resign from Board service rather than disclose their personal identifying information pursuant to the CTA.” But such speculations about potential resignations are insufficient to demonstrate a likelihood of success on the merits.

Plaintiffs also argue that the CTA’s disclosure requirements unconstitutionally invade plaintiffs’ reasonable expectations of privacy without individualized suspicion of wrongdoing. But reporting requirements are not new, nor do they contravene the Fourth Amendment.

Irreparable harm

Plaintiffs next set forth their concern that without injunctive relief CAs will face a mass resignation of their volunteer board members who do not wish to provide their personal information or be subject to the corresponding penalties. But plaintiffs have failed to offer nonspeculative evidence about potential resignations. And if plaintiffs are ultimately successful in obtaining an exemption from FinCEN, any board members who resign could return to their positions.

Remaining factors

Plaintiffs argue that the public interest and equities weigh in favor of an injunction, reiterating their claims that CAs will be unable to operate if the CTA goes into effect on account of mass resignations. Notwithstanding the problems with this argument noted above, this ignores the public interest (as noted by Congress) in the effective enforcement of federal law to counter money laundering and terrorism financing.

Plaintiffs’ motion for preliminary injunction denied.

Community Associations Institute v. Yellen, Case No. 1:24-cv-1597, Oct. 24, 2024. EDVA at Alexandria (Nachmanoff). VLW 024-3-573. 20 pp.