DEAD STOP FOR
THE CORPORATE TRANSPARENCY ACT:
PART II
By
Prof. Anthony Michael Sabino
It is now well known that enforcement of the Corporate Transparency Act has been brought to a dead stop by a nationwide preliminary injunction. See Texas Top Cop Shop, Inc. v. Garland, ___ F.Supp.3d ___ (No. 24-cv-478) (E.D. Texas) (December 3, 2024) (“Texas Top Cop”). Part I of this writing elaborated upon the district court’s finding that the mandatory reporting regime transgressed the limits of Congress’s power to regulate interstate commerce. Here, in Part II, we shall recount the statutory scheme’s other constitutional failings, as identified by the trial bench. And now that the case at bar is before the U.S. Court of Appeals for the Fifth Circuit, we shall reprise those developments as well.
Necessary and Proper Clause
As the “final arrow in the [g]overnment’s quiver,” the defendants invoked the Necessary and Proper Clause as a constitutional foundation for the CTA. See U.S. Const., art. I, § 8, cl. 18. Yet this argument fared no better.
District Judge Mazzant commenced by first reiterating the axioms that would guide the trial bench’s deliberations. First was that, while due respect would be accorded to the powers of government specifically enumerated in the Constitution, nothing beyond those strict boundaries would be honored.
Next, the Texas Eastern District court reminds that it is the solemn duty of the Judiciary to ensure that the Legislative Branch does not slip the bonds of said enumerated powers. Put another way, District Judge Mazzant warned that there would be no “abandonment of the judicial responsibility to strike down ultra vires congressional actions;” nor would the trial court shirk its obligation to preserve the fundamental structure of dual sovereignty which apportions power between the national authorities and the several States.
The district judge was most circumspect in recognizing that the Necessary and Proper Clause is not a freestanding license to legislate; to the contrary, the proviso can only operate “in tandem with an enumerated power.” Therefore, the validity of a law enacted pursuant to the Necessary and Proper Clause must simultaneously demonstrate a rational link to a more specific, enumerated power. To be sure, noted the trial bench, this is “not a high bar,” but it is a bar nonetheless.
Inherent in this segment of Texas Top Cop’s deliberations was the implication that the instant argument regarding the Necessary and Proper Clause was essentially a pastiche of the allegations previously made (to no avail) in NSBU, infra; namely, that the mandatory reporting regime was constitutional as a valid exercise of one, all or any combination of Congress’s typically unassailable prerogatives to regulate commerce, formulate foreign policy or levy taxes.
Unconnected to Foreign Affairs
Poetically characterizing each of these subarguments as a portal, District Judge Mazzant unceremoniously “shut[ ] them all,” finding that the statute “finds no constitutional solace behind any door.” With deft precision, the trial bench first disposed of the assertion that the lawmakers enjoy even more pronounced authority to regulate foreign, as contrasted with domestic, commerce. Even if that were true, opined District Judge Mazzant, the allegation “does nothing to mollify the grave constitutional concern that the CTA does not regulate an activity.”
Next, the government argued that the enactment found justification in Congress’s conjoined roles in formulating foreign policy and safeguarding national security. The district jurist found this contention equally unavailing, given that the mandatory reporting regime was bereft of any coupling, express or implied, to an international treaty. Moreover, the statutory scheme was glaringly defective for reason that it “run[s] headlong” into the Supreme Court’s admonition that the foreign affairs power cannot “trammel upon states’ police power.” See United States v. Bond, 572 U.S. 844 (2014) (statute implementing international treaty banning the use or possession of chemical weapons does not “reach purely local crimes”).
Continuing, District Judge Mazzant opined that the “very language” of the mandatory reporting regime is inapposite to influencing “any issue of foreign affairs.” Quite to the contrary, it interposes the federal government into the distinctly local arena of domestic business formation, and with regard to entities that are inarguably “creatures of state law.” (internal quotations omitted). See Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977). And for this usurpation of state sovereignty, there is “scant, if any, history or precedent.”
Answering the ultimate question—whether the foreign affairs power rendered the CTA’s intrusion into nominally local matters constitutional—District Judge Mazzant replied it does not. If Congress was permitted to “reach into the states and regulate whatever it wants simply by pointing to some vague nexus” between an enactment and a supposed overseas agent, the very “fabric of our dual system of government” would be at risk.
Not a Tax
Now “[b]acked into the corner with one remaining card up its sleeve” in the district court’s estimation, the government renewed the argument already made in NSBU; Congress’s power to levy taxes justified the mandatory reporting regime. See U.S. Const., art. I, § 8, cl. 1. However, since that contention had already failed once, these defendants modified their tactics, now positing in Texas Top Cop that the CTA, while clearly not a tax in and of itself, found constitutional validation as an aid in the collection of revenue.
Extending the playing card analogy, District Judge Mazzant rejected this revised contention as handily as NSBU had turned aside the original version. Pungently declaring that the government’s “final card” did not transmogrify its hand into a winning one, Texas Top Cop concurred with its nearby brethren that a measure which, hypothetically, assists in collecting tax is nonetheless not a tax itself. Therefore, it can find no constitutional purchase in the federal taxing power. Furthermore, well established precedents which had contemplated the constitutionality of similar financial reporting statutes lent no credibility to the CTA’s own claims of validity. Compare California Bankers Association v. Schultz, 416 U.S. 21 (1974) (in resolving constitutional challenges to the Bank Secrecy Act, no reference made to Congress’s power to levy taxes).
Yet all of the foregoing seemed to be mild reproach compared to the stinging rebuke District Judge Mazzant then leveled at the defendants’ taxing power argument. The government, complained Texas Top Cop, has not provided a “single case” suggesting that a regulatory measure that itself generates no revenue represents a valid exercise of the power to levy taxes.
It therefore came as no surprise that the trial bench thereafter utterly rejected any supposition that “Congress may legislate in an unbridled manner simply because it might make some tax, someday, easier to collect.” And in the sharpest retort yet, District Judge Mazzant ruled that it is beyond refute that the statutory scheme “does not impose any tax, whatsoever,” and any “incidental tax benefit” it conceivably provides is much too slim a reed upon which the trial court might base a finding of constitutionality. As to the last mentioned, the Texas Eastern District court solidified its decision by quoting Justice Felix Frankfurter’s long ago declamation that Congress may never cloak a grab for power “’in the verbal cellophane of a revenue measure.’” See U.S. v. Kahriger, 345 U.S. 22, 37 (1953) (Frankfurter, J., dissenting).
For its denouement, after first summarizing its findings that the mandatory reporting regime was starkly lacking in any constitutional foundation, the Texas Eastern District court concluded that the plaintiffs had demonstrated a substantial likelihood of success on the merits, and, therefore, injunctive relief was merited. Accordingly, a preliminary injunction barring enforcement of the CTA across the land was issued. And so it remains, pending appeal.
The Injunction Continues Pending Appeal
As to that appeal, the word volatile immediately comes to mind when one contemplates the brief, yet convulsive, record compiled to date. Less than three weeks after District Judge Mazzant issued his holding, the government persuaded a motions panel of the U.S. Court of Appeals for the Fifth Circuit to grant an emergency stay.
A scant three days later (the day after Christmas, to be precise), that august tribunal, apparently sitting en banc, vacated the stay “in order to preserve the constitutional status quo while [a] merits panel considers the parties’ weighty substantive arguments.” Texas Top Cop Shop, Inc. v. Garland, ___ F.4th ___ (No. 24-40792) (5th Cir. December 26, 2024) (emphasis supplied).
No explanatory opinion accompanied this most recent procedural directive, and we await a briefing schedule. To be sure, one should not be surprised that the appeals court moved with such alacrity to preserve the nationwide preliminary injunction, when one considers the forceful erudition with which Texas Top Cop (as well as NSBU) so thoroughly disabused the government’s arguments asserting that the CTA is constitutional.
At the time of this writing, an emergency application for a stay of Texas Top Cop’s grant of injunctive relief resides with Supreme Court Justice Samuel A. Alito. See Garland v. Texas Top Cop Shop, Inc., ___ U.S. ___ (No. 24A653) (December 31, 2024). It is important to remember that, while we await further word from either the high Court or the Fifth Circuit, enforcement of the statutory scheme is foreclosed.
Conclusion
Our coda is succinct. While its fate is now in the firm hands of the venerable Fifth Circuit, and, quite possibly, the U.S. Supreme Court, we seriously doubt that Texas Top Cop shall be overturned or even modified, given how two district judges had elucidated the irreconcilable nature of the statutory scheme’s constitutional infirmities. Therefore, the CTA is and shall remain at a dead stop, absent congressional reworking of the troubled statutory regime.
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 II v.1
AMS/dal