On September 10, 2024 a complaint was filed in the federal district court for the Eastern District of Virginia on behalf of the Community Associations Institute and several community associations (CAs) seeking declaratory and injunctive relief to prevent enforcement of the Corporate Transparency Act against CAs.
On October 24, 2024, in Community Associations Institute v. Yellen, No. 1:24-cv-1597, the court denied the plaintiffs’ motion for a preliminary injunction, finding 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 equities and public interest weigh in their favor.
Here are some of the highlights from the court’s decision:
1. Regarding the allegation that CAs fall under the CTA’s exemption for tax exempt entities:
- Plaintiffs failed to show a likelihood of success on the merits on this claim.
- The CTA exempts entities described in Sec. 501(c) of the IRC and exempt from taxation under Sec. 501(a). This does not include the plaintiffs, so they are not exempt under that exemption. In addition, the CTA exempts entities exempt from taxation under Sec. 527. If Congress had intended to exempt all tax exempt entities, as plaintiffs’ argue, there would have been no need to specifically include Sec. 527 entities.
2. Regarding the claim FinCEN’s FAQs regarding homeowner’s associations violated the Administrative Procedure Act’s notice and comment rules and are arbitrary and capricious:
- Plaintiffs failed to show a likelihood of success on the merits on this claim.
- FinCEN’s FAQs are interpretive rules and not substantive or legislative rules and therefore are not subject to the APA’s notice and comment requirements.
- FAQs are not a final agency action and therefore cannot be challenged on the basis of being arbitrary and capricious.
3. Regarding the claim the CTA exceeds the constitution’s limits on Congress under Article I.
- Plaintiffs failed to show a likelihood of success on the merits on this claim.
- The court respectfully disagrees with the Northern District of Alabama court in NSBU v. Yellen, that Congress overstepped the outer bounds of its power under the Commerce Clause.
- There is a rational basis for concluding the regulated activity, taken in the aggregate, substantially affects interstate commerce.
- While the CTA reporting requirement may be triggered by the company’s formation, it makes little sense to see the CTA as regulating formation. It regulates the ongoing conduct of covered entities.
- Congress can impose modest reporting requirements that help prevent the interstate and international commercial crimes of money laundering and terrorist financing.
4. Regarding the claim the CTA impermissibly compels CA board members’ speech and chills their associational rights in violation of the First Amendment:
- Plaintiffs failed to show a likelihood of success on the merits on this claim.
- The CTA does not require the public disclosure of information and therefore does not violate the compelled speech doctrine.
- The CTA’s requirements are neither unjustified nor an unduly burdensome way to strengthen the government’s ability to detect and prevent financial crimes.
- Plaintiffs offered no evidence that board members would resign if required to disclose their personal information. Speculation about possible resignations is insufficient to demonstrate a likelihood of success on the merits.
- Even if the First Amendment was implicated, the government would have met its burden of proving that such compelled speech serves a legitimate purpose and any infringing of the rights of association is justified.
5. Regarding the claim the CTA invades the plaintiffs’ reasonable expectation of privacy without individualized suspicion of wrongdoing in violation of the Fourth Amendment:
- Plaintiffs failed to show a likelihood of success on the merits on this claim.
- The CTA falls within the category of reasonable reporting requirements that courts have long understood as constitutional.
6. To meet their burden for a preliminary injunction, plaintiffs also had to demonstrate that irreparable injury is likely in the absence of an injunction.
- Plaintiffs have not met this burden.
- They did not establish any violations of their constitutional rights nor did they offer any nonspeculative evidence of their claim of mass resignations of board members.
- The nature of the alleged harm is “de minimis”.
7. To meet their burden for a preliminary injunction, a plaintiff must also establish that the balance of equities and public interest weighs in favor of an injunction.
- Plaintiffs have not met this burden.
- There is a public interest, as noted by Congress, in the effective enforcement of federal law to counter money laundering and terrorist financing.
The Virginia federal court is the second court to recently deny a motion for a preliminary injunction in a lawsuit challenging the CTA. On September 20, 2024 the court in Firestone v. Yellen, No. 3:24-cv-01034 (D. Ore.), denied a motion for a preliminary injunction, finding that the plaintiffs failed to show a likelihood of success on the merits on their claims that the CTA was beyond the Congress’ powers granted by the Constitution or violated the First, Fourth, Fifth, Eighth, Ninth, or Tenth Amendments.
