DEAD STOP FOR
THE CORPORATE TRANSPARENCY ACT:
PART I
By
Prof. Anthony Michael Sabino
Not long ago in this space, we summarized a federal court ruling which paused the Corporate Transparency Act. See “Hitting ‘Pause’ on the Corporate Transparency Act: Part I,” and “Hitting ‘Pause’ on the Corporate Transparency Act: Part II,” New York Law Journal (June 3 and 10, 2024, respectively), analyzing NSBU v. Yellen, 721 F.Supp.3d 1260 (N.D. Alabama 2024) (“NSBU”).
Today the CTA is no longer merely paused; it has come to a dead stop. A nationwide preliminary injunction barring implementation of the statutory scheme was issued in Texas Top Cop Shop, Inc. v. Garland, ___ F.Supp.3d ___ (No. 24-cv-478) (E.D. Texas) (December 3, 2024) (“Texas Top Cop”), and remains in force, pending an appeal to the U.S. Court of Appeals for the Fifth Circuit (and possible intervention by the U.S. Supreme Court). This two-part writing shall expound upon the Texas Top Cop holding, with the instant installment exemplifying the district court’s rejection of the government’s contention that the mandatory reporting regime represents a legitimate exercise of Congress’s power to regulate interstate commerce. And, in order to avoid undue repetition, we shall assume familiarity with the content of the articles aforementioned.
Specific to the matter at hand: the lead plaintiff is a highly localized storefront business (i.e., no Internet presence whatsoever) specializing in service to first responders; the lead defendant was the then-Attorney General; and the plaintiffs, alleging that the CTA was unconstitutional on multiple grounds, requested the extraordinary remedy of injunctive relief in order to preclude the federal government from enforcing the enactment.
“First Principles”
District Judge Amos L. Mazzant, III memorably opens Texas Top Cop with the postulation that “’[g]reat nations, like great men, should keep their word.’” Quoting Federal Power Commission v. Tuscarora Indian Nation, 362 U.S. 99, 142 (1960) (Black, J., dissenting). Foremost amongst the promises the Constitution makes to the People and the States is that the federal legislative power is defined and limited by the Constitution’s explicit text; it follows, then, that Congress does not enjoy “a roving license to legislate outside the boundaries of our timeless, written Constitution,” even in the face of modern dilemmas. Yet, in sharp contradistinction, the “seemingly benign” CTA embodies an “unprecedented….quasi-Orwellian statute” which is incompatible with the Founding Document’s liberty guarantees.
Relying upon “first principles,” the Texas Eastern District court vigorously reminds that, since the nascent days of the Republic, it has been unquestioned that the explicit conferral of certain powers upon government conversely means the denial of others. To be sure, Congress is not imbued “with a federal police power to regulate all aspects of public life;” such authority, if it even exists, “belongs to the states alone.” See U.S. v. Morrison, 529 U.S. 598 (2000) (federal statute criminalizing gender-motivated violence unconstitutional).
Constraining the national government is a perpetual obligation, emotes District Judge Mazzant, and the case at bar “poses yet another iteration of the question.” Rejecting any “invitation to judicial activism,” the trial bench averred that it would abstain from “wad[ing] into the treacherous waters of policy-making,” rightly the sole domain of the political branches. Nonetheless, the district court made it plain that such deference must not be construed as either judicial abdication nor tacit approval of the lawmakers exercising “unbridled discretion” when promulgating regulations.
The Commerce Clause Power
Texas Top Cop first determined if the CTA found any constitutional footing in the Commerce Clause. U.S. Const., art. I, § 8, cl. 3. Here, District Judge Mazzant wryly observed that the accepted scope of the Clause has “waxed and waned over the years;” nevertheless, federal purview over interstate commerce “is not limitless,” given the Republic’s historical aversion towards grasping, centralized government.
It is axiomatic that Congress may lawfully legislate three branches of interstate commerce: the channels of interstate commerce; its instrumentalities; and activity which substantially affects commerce crossing state lines. Economically bundling together the first two categories, the district judge just as efficiently held that the defendants’ arguments misapprehended the Commerce Clause’s inherent limitations.
Although it claims to regulate “reporting companies,” the plain text of the statutory scheme lacks any reference whatsoever to the channels or the instrumentalities of interstate commerce. Mirroring a key finding of NSBU, infra, the Texas Eastern District court was clearly taken aback that even the word “commerce” is glaringly absent from the enactment. Rather, the CTA appears to be founded upon an indiscriminate presumption that “every company” employs the channels and instruments of interstate commerce.
Remonstrating that the Commerce Clause “does not write Congress a blank regulatory check,” distinguishing American Power & Light Co. v. SEC, 329 U.S. 90 (1946) (Public Utility Holding Act constitutional because it was delimited to regulating interstate utilities), District Judge Mazzant opined that if one were to accept the defendants’ “capacious construction” of the commerce power, lawmakers would have the capacity to “regulate any company, in any way, all the time,” unrestrained by any limitary principle. Rejecting any such accretion of power to the national government, Texas Top Cop concluded that the mandatory reporting regime fell well outside the ambit of the channels or the instrumentalities of interstate commerce.
Failing the “Substantial Affects” Test
Now for the third leg of the Commerce Clause triad; does the CTA regulate activity which substantially affects interstate commerce? No, it does not, responded District Judge Mazzant. To the contrary, the statutory scheme unconstitutionally creates commercial activity. See National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) (Commerce Clause violated when legislation compels, rather than regulates, a commercial act).
Texas Top Cop robustly declares that the commerce power does not imbue the Legislative Branch “with carte balance to regulate all companies in perpetuity simply because they might engage in commerce, or one might use them to conceal criminal activity” (emphasis in the original). Federal authority to oversee commerce between the states cannot justify “regulating all companies based on nothing more than the fear” that a business entity might cloak financial wrongdoing.
The CTA Unravels
When weighted against these maxims, the CTA “begins to unravel.” The enactment “seems only to regulate an entity’s existence,” which is, truthfully, a state of idleness, and thus antithetical to substantive commercial activity susceptible to congressional oversight. District Judge Mazzant sharply remonstrated that “Congress may not invoke the substantial effects doctrine to regulate future activities or no activity at all.”
Notable also is the manner in which Texas Top Cop acutely inveighs the CTA, classifying the statute as “a law enforcement tool—not an instrument calibrated to protect commerce; an exercise of police power, rather than a regulation of an activity which might impair commerce among the several states.” District Judge Mazzant forcefully decreed that the national government has no claim to supremacy over commercial activities, and to condone the mandatory reporting regime “would be to rubber-stamp” a new and dangerous form of national power, threatening federalism itself.
The trial court expressed equal dismay with the statutory scheme’s obvious lack of a jurisdictional link to commerce between the states, a violation of the venerated precept that matters of domestic business formation are inarguably entrusted to the States, in order to forestall “a completely centralized government.” In sum, Texas Top Cop ruled that the CTA is inimical to the principle of dual federal and state sovereignty because it imposes a scheme of mandatory disclosure upon virtually all business entities, all the while lacking a perceptible jurisdictional “hook” to interstate commerce.
Gonzales and Lopez
Even in what might technically be classified as dicta, Texas Top Cop is most illuminating. Leaving nothing to chance, the trial bench addressed what it adjudged to be a tertiary question, there incorporating into its rationale an extensive discussion of two giants of modern Commerce Clause jurisprudence, namely Gonzales v. Raich, 545 U.S. 1 (2005) (established, albeit illegal, interstate market in dangerous narcotics justified federal drug laws as an appropriate exercise of the commerce power), and U.S. v. Lopez, 514 U.S. 549 (1995) (firearms regulation exceeded the constitutional limits of the Commerce Clause; no connection to the channels or the instrumentalities of interstate commerce, and acts so prohibited did not substantially affect interstate commerce).
In a like manner to NSBU, the Texas Eastern District court relied upon these sage landmarks for their “limiting principles,” which simultaneously defined the doctrine of federalism, and opposed the overconcentration of power in the national government. It is the misfortune of the CTA, opined District Judge Mazzant, that the mandatory reporting regime finds no constitutional purchase between these mainstays of the high Court’s Commerce Clause jurisprudence.
Conclusion
Texas Top Cop now resoundingly declared that approbation of the CTA as a valid exercise of the authority granted the Legislative Branch by the Commerce Clause would “sanction such an extension of legislative power today, then there is no telling how Congress would control companies tomorrow.” Undeniably lacking any connection to the channels or the instrumentalities of interstate commerce, and unmoored from activity substantially affecting commerce between the States (if it indeed regulates any activity at all), the enactment was decreed to be plainly unconstitutional.
While this may conclude our exposition of Texas Top Cop’s ultimate finding that the CTA was unconstitutional when viewed in light of the Commerce Clause, this was not the last of the government’s arguments in support of the validity of the statutory scheme. Accordingly, Part II of this writing shall expound upon those remaining contentions, and how they were equally disabused by the Texas Eastern District court.
Prof. Anthony Michael Sabino, partner, Sabino & Sabino, P.C., is also a Professor of Law, Tobin College of Business, St. John’s University. Anthony.Sabino@sabinolaw.com.
FINAL Hitting STOP on the CTA Part I v.1
AMS/dal