Federal Court Rules that Corporate Transparency Act is likely Constitutional: Community Associations must comply by January 1, 2025 to avoid $10,000 in potential civil penalties

Federal Court Rules that Corporate Transparency Act is likely Constitutional: Community Associations must comply by January 1, 2025 to avoid $10,000 in potential civil penalties

The January 1, 2025 deadline for condominium and homeowners associations to comply with the Corporate Transparency Act is fast-approaching. Community associations who fail to comply with the reporting requirements under the Corporate Transparency Act may face civil penalties and possible imprisonment. In a previous article, we have discussed the reporting requirements of the Corporate Transparency Act and how community associations can comply.

There have been numerous challenges to the Corporate Transparency Act. In a prior article, Manging Member, Kevin Hirzel discussed the Alabama federal court judge’s ruling that the Corporate Transparency Act was unconstitutional. In Small Business Ass’n of Michigan v Janet Yellen, et al, Case No. 1:24-CV-00314 (W.D. Michigan), the court denied the plaintiff’s preliminary injunction to stop enforcement of the Corporate Transparency Cat. Accordingly, community associations must still plan to comply with the filing requirements under the Corporate Transparency Act in the Western District of Michigan.

On September 10, 2024, the Community Associations Institute filed a lawsuit in the Eastern District of Virginia against the Department of Treasury seeking an exemption for community associations from the Corporate Transparency Act. This lawsuit is still pending and oral arguments were heard on October 11, 2024.

On June 27, 2024, a complaint was filed in the federal district court for the District of Oregon challenging the constitutionality of the Corporate Transparency Act. In Firestone v. Yellen, Docket No. 3:24-cv-01034 (D. Ore.), the plaintiffs were a group of seven small business owners who challenged that the Corporate Transparency Act exceeded Congress’ authority under Article I of the United States Constitution and violated their constitutional rights.

On September 20, 2024, the court concluded that the Corporate Transparency Act was constitutional. This article will address the court’s decision.

Why did the Court hold that the Corporate Transparency Act was Constitutional?

The court found that the plaintiffs failed to show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable injury; and (3) that the balance of hardships tips sharply in their favor. Firestone at 2. The court discussed the following legal theories:

1. Article I of the United States Constitution

The Corporate Transparency Act is authorized by the Commerce Clause which gives Congress broad authority to regulate interstate commerce and foreign commerce. Accordingly, the court found that the Corporate Transparency Act is directed at commercial entities that have a substantial effect on interstate and foreign commerce. Id. at 13. As such, Congress had the authority to enact the Corporate Transparency Act. Id. at 14.

The Corporate Transparency Act is also authorized by the Necessary and Proper Clause. The court found that Congress concluded that collecting beneficial ownership information is necessary to protect national security and promote U.S. interests abroad, regulate interstate and international commerce, and facilitate tax collection. Id. The court reasoned that Congress’ determination is entitled to substantial deference. Id. Accordingly, the Corporate Transparency Act did not exceed Congress’ constitutional authority. Id.

2. First Amendment

The court disagreed with the plaintiff’s arguments that the Corporate Transparency Act was a violation of the plaintiff’s First Amendment rights. The plaintiff’s argued that the Corporate Transparency Act (i) compelled them to engage in speech with which they disagree and (ii) interfered with their right to freely association with whomever they please. Id. The court found that the compelled speech doctrine was not implicated because the Corporate Transparency Act does not require that the plaintiffs publicly convey any particular message. Id. The court also found that the plaintiffs offered no evidence that someone would hesitate to become an owner of a company because the fact of their ownership would become known to the federal government or because the government may later use that information for a limited set of legitimate purposes. Id. at 18. Accordingly, the plaintiff’s First Amendment rights were not violated.

3. Fourth Amendment

The plaintiffs argued that the Corporate Transparency Act violated their Fourth Amendment rights. The court found that the Corporate Transparency Act falls within the category of reasonable reporting requirements that courts have long understood as constitutional. Id. at 19. Additionally, the Corporate Transparency Act does not disturb any interest that the Fourth Amendment protects because the statute does not involve “non-consensual entr[y] into areas not open to the public. Id. at 20 (citing Donovan v. Lone Steer, Inc., 464 U.S. 408, 414 (1984)). As such, the plaintiff’s Fourth Amendment rights were not violated.

4. Fifth Amendment

The plaintiffs alleged that the CTA violates their Fifth Amendment privilege against coerced self-incrimination because it requires individuals to report activity that is illegal under federal law. Id. at 21. The court found that the plaintiffs failed to identify a legal proceeding that poses an actual risk of self-incrimination and the plaintiffs failed to show injury sufficient to confer standing. Accordingly, the plaintiff’s Fifth Amendment Rights were not violated. Id. at 21-22.

5. Eighth Amendment

The plaintiffs argued that the civil and criminal penalties imposed by the Corporate Transparency Act constituted cruel and unusual punishment or excessive fines in violation of the Eighth Amendment. Id. at 23. The court held that the plaintiff’s claims were unripe and unsuitable for facial challenge because the plaintiffs had not been fined or prosecuted for violating the Corporate Transparency Act. Id. at 24. Furthermore, the court found that the penalties were not excessive because the penalties were not “grossly disproportional” to the gravity of the violation. Id. at 25. As such, the plaintiff’s Eighth Amendment rights were not violated.

6. Ninth Amendment

The plaintiffs argued that the Corporate Transparency Act violated their right to privacy under the Ninth Amendment. Id. However, the court found that the plaintiffs failed to show a likelihood of success on the merits of this claim because the Ninth Amendment does not confer substantive rights beyond those conferred by governing law. Id.

7. Tenth Amendment

Lastly, the plaintiffs argued that the Corporate Transparency Act violated their Tenth Amendment rights. Id. The court found that the plaintiff’s Tenth Amendment rights had not been violated because the court found that the Corporate Transparency Act did not exceed Congress’ constitutional authority under the Commerce Clause. Id.

Conclusion

In Firestone v. Yellen, Docket No. 3:24-cv-01034 (D. Ore.), the Oregon federal court concluded that Congress was well within its authority to enact the Corporate Transparency Act and the Corporate Transparency Act did not violate the plaintiff’s constitutional rights.  Although there is ongoing litigation seeking to prevent community associations from having to comply with the Corporate Transparency Act, a federal court may rely on the Oregon federal court’s ruling and find that the Corporate Transparency Act is constitutional. Therefore, we recommend that community associations comply with the Corporate Transparency Act especially given the potential penalties associated with failing to comply with the Corporate Transparency Act.

Please follow our blog for additional updates on this evolving area of law, as we anticipate further guidance from the courts and FinCEN in the near future.  As of the publication of this article, we still recommend that community associations plan to comply with the CTA until FinCEN issues further guidance or until the appellate courts make final decisions on the constitutionality of the CTA.

 

Jeremy Fernando is an Associate Attorney at Hirzel Law, PLC. Mr. Fernando is licensed to practice law in the State of Illinois. He concentrates his practice on community association law, condominium law, homeowners association law, and real estate law. Mr. Fernando’s legal career includes serving in corporate practice where he represented insurance companies and institutional investors in U.S. and cross-border private placements of securities, including transactions in the Netherlands, England, Ireland, Australia, and Germany. Mr. Fernando earned his Juris Doctor from Marquette University Law School, where he graduated with honors and ranked in the top 15% of his class. He also served as an Associate Editor of the Marquette Law Review. Mr. Fernando is committed to providing effective legal representation to his clients and is passionate about helping communities navigate complex legal challenges. He may be reached at 312-552-7669 or jfernando@hirzellaw.com.