Banking and Finance Law Daily Wrap Up, BANK SECRECY ACT—11th Cir.: Government and NSBA offer starkly contrasting views on CTA in supplemental briefing, (Sep 9, 2024)

By Justin Marcus Smith, J.D.

The government said the plaintiffs failed to show the Corporate Transparency Act lacked any valid constitutional application, but the plaintiffs countered that the district court found the statute wholly invalid on Fourth Amendment grounds.

In court-ordered supplemental briefing about the applicability of Moody v. NetChoice, LLC, 144 S. Ct. 2383 (2024) to appeal a district court holding that the Corporate Transparency Act (CTA) facially invalid, the government emphasized that the National Small Business Association (NSBA) failed to show that all applications of the CTA would exceed the commerce power. The NSBA, meanwhile, contented that the decision below was about the Fourth Amendment such that no application of the CTA could be constitutional. (Nat’l Small Bus. United v. U.S. Dep’t of the Treasury, No. 24-10736 (11th Cir. Aug. 14, 2024)).

Background. The government asked the United States Court of Appeals for the Eleventh Circuit to reverse a district court award of summary judgment that favored the owner of two small businesses and the NSBA in their suit against the Treasury Department in connection with the CTA (see Banking and Finance Law Daily, Apr. 19, 2024). The district court held the CTA facially invalid (see Banking and Finance Law Daily, Mar. 4, 2024). The federal government’s initial appellant brief emphasized that financial crime is a significant problem that involves a “significant gap in the government’s ability to detect and prosecute” because state law generally does not require business entities to report information about their beneficial owners.

In light of the United States Supreme Court decision in Moody v. NetChoice, LLC, 144 S. Ct. 2383 (2024), the Eleventh Circuit ordered the parties to file supplemental briefs addressing the question of whether the district court erred in not holding the plaintiffs to a burden of showing that there are no possible constitutional applications of the CTA.

Government’s brief. The government’s supplemental brief argued that the plaintiffs did not clear the “very high bar” of presenting a facial challenge to the CTA. It said the plaintiffs had only made an “as applied” challenge such that they could not plausibly claim that the CTA has no constitutional application. The government continued that the CTA “readily withstands” the plaintiffs’ facial challenge.

In the government’s view, Congress “properly concluded” that businesses entities engaged in commerce should report their ownership to the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury, to thwart tactics criminals use to evade detection. The government’s brief reasoned that the CTA falls “squarely within” the scope of Congress’ commerce power, and its power under the Necessary and Proper Clause, to enforce “valid prohibitions on money laundering[.]” Accordingly, the government said the plaintiffs came nowhere near clearing the very high bar governing facial challenges. NetChoice, 144 S. Ct. at 2397.

The plaintiff-appellees’ cited cases, United States v. Lopez, 514 U.S. 549 (1995), and United States v. Morrison, 529 U.S. 598 (2000), in contrast, involved activities that were not connected with commerce, and they otherwise ignored many valid CTA applications. Because the CTA is plainly constitutionally applied to companies engaged in commercial activity at the time they file reports, any facial challenge to the CTA must fail. The government contended the plaintiffs’ “inability to identify any reporting company beyond the scope of Congress’s commerce power[]” underscored this point. This problem was especially notable given that all the actual examples of CTA application before the district court were relevant entities that will be engaged in commerce. That should have been sufficient to defeat the plaintiffs’ facial challenge. Moreover, the district court did not determine that it is common for reporting companies to refrain from economic activity and did not determine that the plaintiffs themselves were beyond the reach of the commerce power.

Plaintiffs’ brief. The plaintiffs-appellees’ supplemental brief argued that the district court correctly entered summary judgment because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power as a necessary or proper means of achieving a policy goal. The plaintiffs interpreted the district court holding as necessarily meaning that the CTA has no constitutional applications inasmuch as a law beyond the power of Congress, a law that violates the Fourth Amendment, is no law at all.

The plaintiffs, citing Lopez and Morrison, argued that the district court faithfully adhered to Supreme Court precedents on facial challenges to declare and enjoin federal statutes as beyond Congress’ commerce power. Moreover, NetChoice had no contrary bearing on Lopez or Morrison.

The plaintiffs continued that they had made a specific Fourth Amendment claim that the CTA works an unreasonable, warrantless search on every individual who is a beneficial owner of or an applicant for any state or tribal law entity that Congress did not deem exempt. The plaintiffs emphasized here that their claim did not turn on case-specific facts, but rather on an abstract rule about reporting information to FinCEN that has no permissible application to anyone.

According to the plaintiffs, a facial challenge in the Commerce Clause context is, if anything, more likely to succeed than an as-applied challenge conceding the general validity of a statute. Moreover, they argued NetChoice does not apply to this case because the NetChoice parties treated the cases the plaintiff chose to litigate more like as-applied challenges rather than facial challenges.

The plaintiffs otherwise said the CTA has simple, categorical applicability to every person who forms a state or tribal law entity, so there are really no particular applications to explore for possible validity.

In addition, the CTA, as a federal statute, encroaches on state-law primacy over entity formation and governance. This differed from the state laws at issue in NetChoice, posing a federalism problem. In addition, the risk of premature facial adjudication of a statute was not present here because the plaintiffs, unlike the ones in NetChoice, did not seek preliminary relief.

So long as the CTA authorized searches that run contrary to the Fourth Amendment, there were no particular, valid applications to consider, and the court properly held that the CTA unconstitutional in all of its applications.

The case is No. 24-10736.

Attorneys: Thomas Lee (Law Office of Thomas Lee) for National Small Business United d/b/a National Small Business Association. Steven H. Hazel, U.S. Department of Justice, for U.S. Department of the Treasury.

Companies: National Small Business United d/b/a National Small Business Association; U.S. Department of the Treasury

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