HITTING “PAUSE” ON THE
CORPORATE TRANSPARENCY ACT:
PART II
By
Prof. Anthony Michael Sabino
In National Small Business United v. Yellen, ___ F.Supp.3d ____ (No. 22-cv-01448) (N.D. Ala. March 1, 2024) (“NSBU”), a federal district court found the Corporate Transparency Act (the “CTA”) unconstitutional on multiple grounds. Part I of this writing posited the trial bench’s determination that the statute could not be sustained pursuant to Congress’s powers to conduct foreign affairs and levy taxes, respectively. This installment shall analyze District Judge Liles C. Burke’s holding that the enactment was similarly beyond the lawmakers’ authority to “regulate commerce with foreign Nations, and among the several States,” better known as the Commerce Clause power. U.S. Const., art. I, § 8, cl.3.
The Commerce Clause Generally
But first, a quick primer. The Supreme Court has recognized on innumerable occasions that the Commerce Clause authorizes the Article I Branch to regulate three broad categories of business: the “channels” of interstate commerce; the “instrumentalities” of interstate commerce; and, finally, activities which have “substantial effects” upon interstate commerce. See United States v. Morrison, 529 U.S. 598 (2000). In the case at bar, the government brashly contended that the CTA qualified under all three classifications.
“Channels” of Interstate Commerce
Addressing these allegations seriatim, the trial bench candidly acknowledged Congress’s authority to forestall the perversion of the channels of interstate commerce into conduits for lawlessness. See United States v. Orito, 413 U.S. 139 (1973). Notwithstanding, “nowhere to be found in the CTA” is the actual word “commerce” or any discernible references to the “channels” thereof. The enactment’s self-imposed restriction to statutorily defined “reporting companies” was of no moment, given that “the plain text of the CTA” was unrelatable to any “commercial or economic activity.”
NSBU was careful to distinguish the statute from other federal enactments regulating commerce. For one, national banking laws survive scrutiny because their application is restricted to “money actually moving in foreign and interstate commerce” (emphasis in the original), and are imposed solely upon banks, not bank customers. See, generally, California Bankers Association v. Shultz, 416 U.S. 21 (1974) (upholding the Bank Secrecy Act). For another, compare the CTA to the former Public Utility Holding Company Act of 1935. Promulgated as part of the New Deal, that regulatory regime passed constitutional muster for reason that it was delimited to electric utilities clearly in the stream of interstate commerce. See, generally, American Power & Light Co. v. S.E.C., 329 U.S. 90 (1946). In sharp contradistinction, the CTA “regulates most State entities, not just entities that move in commerce.”
Acting under the auspices of the aforementioned high Court precedents, the lawmakers have proven time and again their facility for promulgating “countless other statutes” barring the misuse of the channels of interstate commerce. Yet those same landmarks from the supreme tribunal caution that Congress may venture “no further,” as the Commerce Clause is not permissive of statutory schemes regulating “an entire class whenever some sub-class engages in commerce.”
NSBU was further constrained to point out that these touchstones “illustrate how easily Congress could have written the CTA to pass constitutional muster.” In what might be construed as either a mild rebuke or a gentle reminder to the Legislative Branch, Judge Burke hinted at a different outcome had the lawmakers “impos[ed] the CTA’s disclosure requirements on State entities as soon as they engaged in commerce” (emphasis supplied).
No matter, for the district court could not reconcile the statutory regime now before it with Article I’s limitations upon congressional authority to oversee the “channels” of interstate commerce. Moreover, since Judge Burke had conjoined his analysis of the “instrumentalities” leg of the Commerce Clause to his deliberations upon the enactment as regulating the “channels” of interstate commerce, the trial court thereby disposed of the first two legs of triad, with unfavorable results for the statute.
“Substantial Effects” Upon Interstate Commerce
Unsurprisingly, the CTA fared no better when considered pursuant to the “substantial effects” component of the Commerce Clause. To be sure, NSBU acknowledged that a more “expansive doctrine” prevails here. Congress has long been permitted to impose federal law upon even intrastate, noneconomic activity, provided the activity in question significantly impacts commerce between the States, the statute is part of a comprehensive scheme facially overseeing business activity, and any burden upon noncommercial activity is vital to the effective regulation of interstate commerce.
Judge Burke spoke plainly; “future activities of state entities are not enough” to justify laws anticipating “substantial effects” (emphasis in the original). The Commerce Clause is not a generalized license for overseeing individuals from the cradle to the grave, not even where there is “a near certainty” that those to be subjected to such mandates will someday take part in commercial endeavors susceptible to federal regulation. See National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012).
The trial court next inquired if forming a business entity was, in and of itself, a commercial enterprise which significantly affects commerce between the States or if the CTA was constitutional for reason that numerous entities falling within its ambit purportedly have substantial effects upon interstate commerce? Indeed, Judge Burke dryly commented that the law’s proponents placed great reliance upon the latter contention.
The CTA Is Unconstitutional
Answering “no” to both questions, NSBU decreed that the Commerce Clause did not empower Congress to regulate noncommercial, intrastate activity merely because some entities, having availed themselves of local business formation laws, thereafter utilize the channels of or have a substantial effect upon interstate commerce. The trial court found nothing in the vast inventory of federal and state commercial regulation which provided a historical precedent for the CTA’s extensive reach, a fact which the trial bench found most disconcerting.
In addition to its novelty, the statutory regime is moreover troublesome because “it is not a facial regulation of commercial activity,” a traditional hallmark of valid substantial effects legislation. See Morrison, infra (Commerce Clause did not provide a constitutional basis for punishing domestic violence). Merely submitting documents to a state agency to form a business entity, cautioned Judge Burke, is a ministerial act “far too attenuated” from criminal activity to justify the CTA’s reporting requirements. If the district court accepted the government’s view of the “substantial effects” test, then “Congress’ commerce powers would be functionally limitless.”
To be clear, the NSBU court agreed, at least in part, with the postulation that tax evasion, money laundering, and fraud are, in a manner of speaking, quintessentially commercial activities (albeit prohibited), each of which the lawmakers have successfully and constitutionally outlawed. See, i.e., Gonzalez v. Raich, 545 U.S. 1 (2005). “Even so,” countered Judge Burke, a mere act of business formation, the very thing the CTA proposes to regulate, cannot rightly be said to have a substantial effect upon interstate commerce. See United States v. Lopez, 514 U.S. 549 (1995). Furthermore, the trial bench mildly criticized the government’s argument for piling inferences upon inferences, in a fraught attempt to justify a causal chain much “too attenuated” to survive scrutiny.
The NSBU court then drove home three salient points as it summarized its reasons for declaring the CTA to be unconstitutional on Commerce Clause grounds: incorporation is a single, discrete action, implicitly disconnected from any financial transactions that might follow; the statute “does not regulate economic or commercial activity on its face;” and the enactment is “far from essential” to effectuate Congress’s acknowledged power to regulate interstate commerce.
Missing a Jurisdictional “Hook”
Then, in a sharp rebuke so fundamental and so damning that it might very well render his decision impervious to reversal, Judge Burke proclaimed that “the CTA is missing a crucial component of valid substantial effects legislation:” an explicit jurisdictional “hook.” NSBU took note that it has long been the lawmakers’ “standard operating procedure” to incorporate into regulatory enactments a clear nexus to interstate commerce, in order to fortify new legislation against anticipated constitutional challenges. Clearly, “Congress knows to include one when it wants to,” and the omission in this instance left the district court plainly astonished.
Finally, it was of no moment that mere “inartful drafting” might be the reason behind this perceptible lack of a jurisdictional link within the law’s text. Only Congress can revise statutes, District Judge Burke forcefully opined, steadfastly refusing to rescue the lawmakers from any supposed errors committed in crafting this legislation. To the contrary, the veteran jurist remained steadfast to the ageless precept that the task of the federal courts is to interpret the law, not write it. See Lamie v. U.S. Trustee, 540 U.S. 526. See also Arizona v. Mayorkas, 598 U.S. ___, ___ (No. 22-592) (December 27, 2022) (slip op. at 3) (Gorsuch, J., dissenting) (Article III establishes “court[s] of law, not policymakers of last resort.”).
The triangle was now complete. Declaring the CTA unconstitutional on Commerce Clause grounds, as well as beyond Congress’s powers to conduct foreign policy and impose taxes, NSBU had relegated the enactment to an uncertain future.
Conclusion
To conclude, we find NSBU’s thorough and erudite reasoning irreproachable. Congress exceeded its legislative remit on at least three separate counts when it enacted the CTA. Yet the statute can be redeemed, provided the lawmakers act upon the district court’s suggestion to make entry into the stream of interstate commerce the prerequisite for the law’s reporting requirements. The next move is up to Congress. But for now, it is time to hit “pause” on the CTA.
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 Pause on the CTA Part II v.1
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