Corporate Transparency Act Reaches the 11th Circuit

Last week, challengers of the Corporate Transparency Act’s beneficial ownership information reporting requirements argued their position in the first case to reach a federal appellate court — however, it was unclear whether the 11th Circuit panel was receptive. (National Small Business United v. Yellen (No. 24-10736).)

Background.

Congress passed the Corporate Transparency Act in 2021, requiring that businesses report to Treasury’s Financial Crimes Enforcement Network (FinCEN) information about individuals who own or control their company. Reports for existing businesses are generally due January 1, 2025.

The intention of the reporting requirements is to aid the government in detecting financial crimes — but lawsuits have popped up around the country contending that the requirements are unconstitutional.

In March, an Alabama federal district court was receptive to those arguments, enjoining FinCEN from enforcing the reporting requirements against plaintiff National Small Business United (NSBU) and its members. ((DC AL 3/1/2024) 133 AFTR 2d 2024-885) That court found the Corporate Transparency Act to be unconstitutional because “it cannot be justified as an exercise of Congress’ enumerated powers.” The government appealed to the 11th Circuit.

National Small Business United (NSBU) has advanced several arguments as to why the Corporate Transparency Act is unconstitutional — among them that Congress exceeded its powers in enacting the law because it usurps states’ powers over the formation of corporate entities and that the law constitutes an unreasonable search and seizure under the Fourth Amendment.

During the September 27 oral arguments, a panel of 11th Circuit judges questioned NSBU’s attorney Thomas Lee on what standard applies to enumerated powers challenges — noting circuit precedent — and whether the Fourth Amendment argument was too “far-reaching.”

Commerce clause.

The argument in favor of Congress’ authority to require the reporting is grounded in the commerce clause. To prevail, said Steven Hazel, who argued on behalf of the Justice Department, the government could show that the entities subject to the Corporate Transparency Act’s requirements are connected with commerce and that the statute “is necessary to effectuate a broader scheme.”

Lee, however, argued that not all entities that register with a state actually engage in commerce. He contended that what the statute actually aims to do is “track any person who sets up a legal entity and require that person to disclose personal information by virtue of having set up that entity. There’s no requirement under the statute of any commercial activities.”

“These regulations apply to reporting companies,” the bulk of whom have “been engaged in business for a long time,” countered Hazel. He added that the “plaintiffs still haven’t identified any actual business that is not engaged in economic activity.” And “the reason that you create a corporation, the thing that corporations normally do, that’s all commerce,” said Hazel.

Judge Andrew Brasher seemed to agree, noting that the “businesses don’t, like, write poetry or just … listen to music. So, it would have to be economic.” He told Lee that his “best” hypothetical is “the businesses that are set up and sort of just sit there.”

When asked why the district court found for NSBU, Hazel said “I think the district court just misunderstood what this statute is regulating.” Hazel also said that “at a minimum, these plaintiffs, themselves, are engaged in economic activity and are within the commerce power.”

Kevin Shepherd, a partner at Venable, told Checkpoint he felt the panel was “receptive to the argument that there was a legitimate congressional commerce clause exercise.” He added that the judges seemed to be “leaning into the overall goal” of what the Corporate Transparency Act is trying to achieve — “preventing money laundering, terror financing, and similar economic crimes.”

The standard for facial challenges.

NSBU, however, is not challenging the Corporate Transparency Act as applied in a particular circumstance, but rather has said the law “has no constitutional applications.” Prevailing on a facial challenge requires clearing a “very high bar,” the government has argued in its briefing. And NSBU has failed to do so, said the government, because of the “many valid applications” of the statute as to “companies engaged in interstate commercial activity at the time they file reports.”

During oral arguments, Hazel emphasized that “the way to analyze these facial challenges is not to… focus on… the wacky hypotheticals. It’s to focus on the places where the statute is most likely to be constitutional.”

NSBU has argued that facial challenges should be evaluated under a different standard when enumerated powers are at issue. “If Congress lacks constitutional power to enact a federal statute, then that statute is facially invalid and has no constitutional applications,” it said in briefing.

Judge Kevin Newsom, however, noted the 11th Circuit’s decisions in U.S. v. Paige (604 F.3d 1268, 1274 (11th Cir. 2010)) and U.S. v. Pugh (90 F.4th 1318 (11th Cir. Jan. 2024) which he said “seemed to me as I read them to apply the same old standard to enumerated powers challenges.” Likewise, the government’s reading of the cases is that they both show the 11th Circuit “enforces the onerous standards governing facial challenges in enumerated powers cases.” Judge Newsom added that NSBU’s supplemental briefing failed to address either case.

Judge Brasher appeared to agree, noting that “it seems like the standard” is to show that a statute “doesn’t regulate commercial activity or economic activity.”

Angela Gamalski, a partner at Honigman and chair of the firm’s Corporate Transparency Act Task Force, said she anticipates that rather than ruling on the merits, the 11th Circuit will push the case back down to the district court. The basis for that, she explained would be that the district court “didn’t consider all of the precedent that applies” in the circuit — essentially, the circuit’s “own standards” — in its ruling.

Fourth Amendment argument.

The plaintiffs’ Fourth Amendment argument seemed to fall flat, with Judge Brasher calling it “really far reaching.” He added that “there’s all sorts of regulatory provisions and disclosure provisions that require you to disclose if you’re going to engage in certain activity.”

The panel questioned Hazel about whether it should address the Fourth Amendment argument, or remand to the district court. Hazel didn’t have “a strong view” on which court should take it on, but emphasized that “it’s obviously correct that the district court then didn’t get into it.” According to Hazel, “this is straightforwardly, not a Fourth Amendment concern … It’s a reporting requirement, involving a limited amount of information.”

Shepherd felt the panel “expressed considerable skepticism about prevailing” on the Fourth Amendment argument. “I don’t think the Fourth Amendment is going to be the saving grace,” he added.

What’s next?

According to Gamalski, the 11th Circuit “just didn’t seem to be leaning towards what a strong group of people want to hear — that this isn’t constitutional.” The case is under an accelerated briefing schedule, she added, and a decision is likely before the end of the year.

With beneficial ownership reports due January 1, 2025, for existing entities, Gamalski said entities should “absolutely” not wait to file.

It could be “an all-day task” for company groups with a number of entities, she explained, just because those groups will need to determine what information they need and track it down. However, “for many companies, it only takes about 20 minutes to get through their report, if that,” said Gamalski.