On October 24, 2024, the United States District Court for the Eastern District of Virginia issued its ruling on the preliminary injunction hearing held on October 11, 2024 in the lawsuit filed by Community Associations Institute (CAI), and a handful of community associations, against the United States Department of Treasury, Janet Yellen, in her official capacity as the Secretary of the United States Department of Treasury, and Andrea Gacki, in her official capacity as Director of Financial Crimes Enforcement Network (FinCEN). The lawsuit seeks to exempt community association from the Corporate Transparency Act (CTA) and its requirement that community associations file and maintain updated Beneficial Ownership Information Reports (BOIR). During the October 11 hearing, CAI argued for and requested that the Court issue a preliminary injunction that would temporarily exempt community associations from filing BOIRs during the pendency of the lawsuit. However, the Court did not grant CAI’s request for this preliminary injunction.
In considering whether to grant a preliminary junction, the Court looked at four factors: likelihood of success on the merits, risk of irreparable harm, balance of equities and public interest. We provide a brief summary of the Court’s findings with respect to each factor. For more information, you may access the Court’s full ruling here: https://bit.ly/4hlJXIK.
- Likelihood of success on the merits.
The Court found that CAI is not likely to succeed on the merits of its lawsuit.
CAI argued that community associations should be exempt from the CTA based on the CTA’s definition of “reporting companies” and various provisions of the Internal Revenue Code pertaining to tax exempt entities. The Court rejected this argument, based on the plain meaning of the CTA and on the fact that the exemption for tax-exempt entities only applies to a discrete group of tax-exempt organizations, not all tax-exempt organizations.
CAI did not challenge an action of the Financial Crimes Enforcement Network (FinCEN); therefore, it cannot prevail on its argument that FinCEN’s FAQs, which address community associations and provide information on who is considered a beneficial owner, among other things, violated notice-and-comment rulemaking requirements or were arbitrary and capricious. The Court found that FinCEN was not required to engage in notice-and-comment rulemaking with respect to its FAQs. The Court further found that FAQs are not a final agency action subject to challenge.
CAI argued that Congress overstepped the boundaries of its commerce powers when it enacted the CTA because it governs intrastate activity (i.e., corporate formation which occurs within a state) versus interstate activity (i.e., commerce/business transactions occurring across state borders). The Court disagreed finding that the CTA regulates the ongoing conduct of community associations, along with all other covered entities. Taking all covered entities in the aggregate, the CTA serves to protect against money laundering and financial terrorism, which is oftentimes an interstate activity. It can also be international activity, which is also within Congress’s powers to regulate.
CAI argued that the CTA violates First Amendment rights of free speech and association, as well as Fourth Amendment rights to be free from illegal searches and seizures. The Court disagreed. The CTA requires the private disclosure of information, not public disclosure, which the First Amendment protects. Further, identifying and protecting against money laundering and financial terrorism is a legitimate government purpose warranting this private disclosure of information. Also, speculating that a wave of directors will resign if forced to provide their personal information is not sufficient evidence that the CTA impeded these directors’ rights to free association. Lastly, the information required is already information that every tax filing individual provides to the government on an annual basis. Providing this information is not an illegal search or seizure.
- Irreparable harm.
The Court found that CAI failed to show that it would suffer irreparable harm if the Court did not grant a preliminary injunction. CAI argued that the constitutional rights of community associations and their beneficial owners are being threatened or violated. The Court found otherwise. CAI also argued that community associations will suffer a wave of resignations by board members who do not want to disclose their personal information as part of the BOIR. The Court found that CAI failed to provide sufficient evidence of this suggested harm. Further, the Court reasoned that this suggested harm may not come to fruition because individual taxpayers (such as those board members required to submit beneficial ownership information) already disclose the same information required by the BOIR every time they file tax returns.
- Balance of equities and public interest.
The Court found that CAI failed to show that the balance of equities and public interest weigh in favor of a preliminary injunction. For these factors, CAI focused on its argument that community associations will not be able to operate if forced to comply with the CTA due to a wave of resignations. Instead, the Court found identifying and protecting against money laundering and financial terrorism to be more compelling and in line with public interest than speculation of a wave of resignations.
In light of the Court’s ruling, community associations must comply with the CTA, and board members and other beneficial owners (those who hold a 25% or greater interest in the community association) must file their BOI with FinCEN by January 1, 2025. If not, severe penalties may apply, including civil fines up to $500 per day (annually adjusted for inflation) and criminal penalties of up to two years in prison and a fine up to $10,000. If you need assistance with filing your community association’s BOI (done as part of a BOIR) or if you have any questions, please contact this firm.
The information contained in this article is not intended to be legal advice and is provided for educational purposes only.
