National Small Business United v. YellenNational Small Business United v. Yellen
The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.
When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act (“CTA”). Although the CTA made up just over 21 pages of the NDAA’s nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm.
By requiring these disclosures, Congress aimed to prevent financial crimes like money laundering and tax evasion, which are often committed through shell corporations. Broadly defined, a shell corporation is a legal entity with no (or minimal) employees, customers, business, or assets. Although shell corporations serve many legitimate purposes, it’s also possible to disguise the identity of interested individuals and the flow of money by layering shell companies on top of each other, “such that each time an investigator obtains ownership records for a domestic or foreign entity, the newly identified entity is yet another corporate entity, necessitating a repeat of the same process[.]”
Yet corporate formation includes far more than for-profit enterprise. Each year, the States grant formal status to millions of entities that can and do serve “any lawful purpose,” including benefit corporations, non-profits, holding companies, political organizations, and everything in between.
The Government’s arguments are not supported by precedent. Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the Plaintiffs are entitled to judgment as a matter of law. As a result, the Court GRANTS the Plaintiffs’ motion for summary judgment and DENIES the Government’s motion to dismiss and alternative cross-motion for summary judgment.
I. Background
Plaintiffs. Plaintiff National Small Business Association is “an Ohio non-profit corporation that represents and protects the rights of small businesses across the United States,” including “over 65,000 businesses and entrepreneurs located in all 50 states.” (Doc. 39-2 at 1-2). The NSBA’s stated purpose is “to advocate for its
members” and their employees, and “to provide its members guidance and data on how to navigate government regulations.” Id. at 2.
Plaintiff Isaac Winkles is an NSBA member and owner of two small businesses, one of which “is a small family business with 3 full-time employees and annual turnover of under $20 million.” (Doc. 39-3 at 1-2).
Procedural Background. The Treasury Department’s criminal-enforcement bureau, the Financial Crimes Enforcement Network (“FinCEN”), issued a final rule implementing the CTA on September 29, 2022, slated to go into effect on January 1, 2024. 87 Fed. Reg. 59498 (Sept. 30, 2022) (codified at
The Operation of the Corporate Transparency Act. As always, “[o]ur analysis begins and ends with the text,” Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545, 553 (2014), and the text of the CTA is wide-ranging in scope. The CTA regulates “reporting company[ies],” defined as “corporation[s], limited liability company[ies], or other similar entit[ies]” that are either “(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe, or (ii) formed under the law of a foreign country and registered to do
In total, FinCEN estimates that the CTA applies to 32.6 million currently existing entities and 5 million new entities formed each year from 2025 to 2034. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. at, 59,549. The CTA requires these millions of entities to disclose the identity and information of any “beneficial owner.”
“substantial control” is as vague as it sounds—although it includes some clear categories like “senior officer[s],” FinCEN’s regulations “clarify” that a person with substantial control also includes someone who “[h]as any other form of substantial control over the reporting company” besides those listed.
For new entities incorporated from January 1, 2024, onward, the CTA requires them to disclose the identity and information of both Beneficial Owners and “Applicants,” defined as “any individual who files an application to form a corporation, LLC, or other similar entity under the laws of a State or Indian Tribe; or registers [a foreign entity] to do business in the United States.”
Reporting entities must give FinCEN a Beneficial Owner or Applicant’s full legal name, date of birth, current address, and identification number from a driver’s license, ID card, or passport.
The CTA’s disclosure requirements aren’t toothless, either: knowing or willful violations carry serious civil and criminal penalties. A willful provision of false or fraudulent beneficial ownership information or failure to report “complete or updated beneficial ownership information to FinCEN” by “any person” is punishable by a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison,
Crucially (at least for standing purposes), these severe penalties apply to individuals, not reporting entities. For starters, a disembodied corporate entity cannot be sentenced to federal prison. Beyond that, although the CTA does not define “person,” it does define both “United
The ultimate result of this statutory scheme is that tens of millions of Americans must either disclose their personal information to FinCEN through State-registered entities, or risk years of prison time and thousands of dollars in civil and criminal fines.
II. Legal Standards
Although the Government requested summary judgment as an alternative to its motion to dismiss, summary judgment is the most appropriate means for resolving this case. The parties have waived discovery and agreed that this case can be “resolved through dispositive motions.” (Doc. 16 at 3). Furthermore, when there are no genuine issues of material fact and “the only issues before the Court are pure questions of law,” disposition of the case by summary judgment is particularly appropriate. Maxim Crane Works, L.P. v. Zurich Am. Ins., 11 F.4th 345, 350 (5th Cir. 2021) (cleaned up); Saregama India Ltd. v. Mosley, 635 F.3d 1284, 1290 (11th Cir. 2011) (“When the only question a court must decide is a question of law, summary judgment may be granted.”).
Under
III. Discussion
The Court’s opinion is in two parts. First, the Court considers its own jurisdiction, looking mainly to the Plaintiffs’ standing. Having found that Winkles is a regulated party and a member of the NSBA, and that the NSBA has associational standing as a result, the Court concludes that both Plaintiffs have standing to bring their constitutional claims.
With standing out of the way, the Court then addresses the Government’s proffered justifications for the CTA’s constitutionality—that the CTA falls within the ambit of the Commerce, Taxing, and Necessary and Proper Clauses, along with Congress’ foreign affairs and national security powers. After a close look at each of these putative justifications, the Court concludes that the CTA is not authorized by the Constitution.
A. Standing
The first order of business is to make sure the Court has jurisdiction to decide the merits of this case.
traceable to the defendant’s challenged behavior; and likely to be redressed by a favorable ruling.” Davis v. Fed. Election Comm‘n, 554 U.S. 724, 733 (2008).
According to the Government, neither Plaintiff has standing to bring this suit: Winkles, it suggests, has failed to show a concrete and particularized injury, while NSBA has failed to support its claim to organizational, third-party, or associational standing. Neither argument is persuasive.
1. Plaintiff Isaac Winkles
Winkles has standing to challenge the CTA’s beneficial owner provisions because the compelled disclosure of Winkles’ sensitive personal information to FinCEN is a concrete, imminent injury that is traceable to the government, and redressable by a favorable decision. The Government does not dispute that the CTA will require Winkles, as the beneficial owner of at least one reporting entity, to submit his beneficial owner status and information to FinCEN. As a result, because Winkles has “challeng[ed] the legality of government action” and is undisputedly the “object of the action,” there is “little question that the action or inaction has caused him injury, and that a judgment preventing or requiring the action will redress it.” Lujan, 504 U.S. at 561-62.
The Government disagrees. In its view, Winkles’ injuries aren’t traceable to the CTA or redressable by a favorable decision because he has already disclosed at least some of the required information while complying with other regulatory
requirements, like “tax returns, passport forms, and bank account applications.” (Doc. 24-1 at 19-20). The Government also argues that Winkles isn’t injured by disclosing government-provided information like a passport number to the government. Id. at 20.
Yet federal subdivisions like FinCEN must still follow standard judicial procedures to obtain even federally provided information without an express authorization like the CTA’s. And although the Government says that disclosure to FinCEN is no big deal because it’s “no secret” that Winkles is the beneficial owner of at least one company, id., the Government never explains why it needs to compel Winkles to disclose beneficial owner information at all if that information is so easily discovered by other means. After all, FinCEN already compels banks and other financial institutions to obtain nearly identical information from State entity customers and provide it to FinCEN. See
The Government’s standing arguments miss the mark for an additional reason: the injury to Winkles is not disclosure itself, but disclosure to FinCEN, the Treasury Department’s criminal enforcement division. The mandatory disclosure of personal information to FinCEN for law-enforcement purposes satisfies the injury requirement for Winkles’ First, Fourth, and Fifth Amendment claims, since courts
“accept as valid the merits of [the non-movant’s] legal claims” for standing purposes when deciding a motion for summary judgment, Fed. Election Comm‘n v. Cruz, 596 U.S. 289, 298 (2022), and Winkles has alleged that the CTA requires disclosure of “sensitive personal information to FinCEN for law enforcement purposes.” (Doc. 1 at 4); see also id. at 11 (“Winkles will be subject to the
Winkles also has standing to challenge the CTA’s applicant disclosure requirement. Because “standing is not dispensed in gross,” Lewis v. Casey, 518 U.S. 343, 358, n.6 (1996), Winkles is obligated “to demonstrate standing for each claim he seeks to press.” DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 352 (2006). In a pre-enforcement challenge like this one, the injury-in-fact requirement is met when the plaintiff “alleges an intention to engage in a course of conduct arguably affected with a constitutional interest, but proscribed by a statute, and there exists a credible threat of prosecution” under that statute. Susan B. Anthony List v. Driehaus, 573 U.S. 149, 159 (2014) (internal quotation marks omitted).
Here, Winkles has submitted sworn testimony that he has “formed [other Alabama entities] in the past,” and he “anticipate[s] forming other Alabama entities
over the next few years.” (Doc. 39-3 at 2). Because the CTA would impose serious criminal penalties on Winkles for non-compliance with the CTA’s applicant disclosure requirements, “it is not necessary that [Winkles] first expose himself to actual arrest or prosecution to be entitled to challenge [the] statute.” Steffel v. Thompson, 415 U.S. 452, 459 (1974). And because there is no doubt the CTA will be applied with its full force, “the plaintiffs’ fear of prosecution [is] not imaginary or wholly speculative.” Susan B. Anthony List, 573 U.S. at 160 (internal quotation marks omitted). As a result, Winkles has standing to challenge the CTA’s applicant provisions because they present Winkles with a choice between compliance and felony prosecution. (Doc. 35-3 at 3) (Winkles’ Affidavit: “[i]f I do not comply with these rules, I understand that I may face fines and even imprisonment.”).
Finally, Winkles’ standing to challenge the CTA’s applicant and beneficial owner provisions on First, Fourth, and Fifth Amendment grounds gives him standing to challenge the CTA as a congressional overreach. Although “[i]ndividuals have no standing to complain simply that their Government is violating the law,” Winkles “is a party to an otherwise justiciable case or controversy,” and is therefore allowed “to object that [his] injury results from disregard of the federal structure of our Government.” Bond v. United States, 564 U.S. 211, 225-26 (2011).
2. National Small Business Association
The Government attacks NSBA’s standing on three fronts, asserting that the NSBA lacks organizational, third party, and associational standing. When it comes to federal jurisdiction, however, standing on one leg is as good as standing on three. Because Winkles is a member of the NSBA and has standing as an individual, the NSBA has associational standing.
“An association has standing to bring suit on behalf of its members when its members would otherwise have standing to sue in their own right.” Georgia Republican Party v. Sec. & Exch. Comm‘n, 888 F.3d 1198, 1203 (11th Cir. 2018). “[O]rganizations can assert the standing of their members.” Summers v. Earth Island Inst., 555 U.S. 488, 494 (2009). That said, organizations can’t merely allege that a member has standing—instead, “an organization must make specific allegations establishing that at least one identified member has suffered or will suffer harm.” Georgia Republican Party v. Sec. & Exch. Comm‘n, 888 F.3d 1198, 1203 (11th Cir. 2018) (cleaned up).
NSBA has done so here. Winkles has standing on his own and has been a dues-paying member of the NSBA since 2021. (Doc. 39-2 at 4; Doc. 39-3 at 2). Furthermore, “the interests at stake are germane to the [NSBA]’s purpose, and neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” Friends of the Earth, Inc. v. Laidlaw Env‘t
Servs. (TOC), Inc., 528 U.S. 167, 181 (2000). As a result, the NSBA has satisfied the requirements of associational standing.
Having determined that both Winkles and the NSBA have standing to challenge the CTA, the Court next considers whether Congress had the authority to enact it.
B. Constitutionality of the CTA
The powers of the federal government are expressly enumerated in the Constitution. McCulloch v. Maryland, 4 Wheat. 316, 405 (1819). To protect individual liberty, the Founders also drafted the Constitution to ensure “separation and independence of the coordinate branches of the Federal Government,” which “prevent[s] the accumulation of excessive power in any one branch.” Gregory v. Ashcroft, 501 U.S. 452, 458 (1991). Within the green pastures of its enumerated powers, however, Congress may frolic with “great latitude.” Nat‘l Fed‘n of Indep. Bus. v. Sebelius, 567 U.S. 519, 537 (2012).
Still, because enumeration itself “presupposes something not enumerated,” Congress cannot range wherever it pleases. Gibbons v. Ogden, 9 Wheat. 1, 195 (1824). It’s as simple as expressio unius est exclusio alterius: “The Constitution’s express conferral of some powers makes clear that it does not grant others. And the federal government ‘can exercise only the powers granted to it.’” NFIB, 567 U.S. at 534-35 (quoting McCulloch, 4 Wheat. at 405).
To be sure, a “[p]roper respect for a coordinate branch of the government requires that [a court] strike down an Act of Congress only if the lack of constitutional authority to pass the act in question is clearly demonstrated.” Id. at 538 (cleaned up). But appropriate judicial deference to Congressional action ends at the borders of the Constitution, because “there can be no question that it is the responsibility of [the courts] to enforce the limits on federal power by striking down acts of Congress that transgress those limits.” Id. After all, a law “beyond the power of Congress” is “no law at all.” Nigro v. United States, 276 U.S. 332, 341 (1928).
The Government offers three sources of constitutional authority for Congress’ enactment of the CTA. First, the Government argues that Congress has the power to enact the CTA under its foreign affairs powers. That is so, the Government says, because the political branches have plenary
purpose of the FinCEN database created by the CTA is to assist in efficient tax administration.
1. Foreign Affairs & National Security
The Government first turns to Congress’ extensive powers over foreign affairs and national security and the Necessary and Proper Clause. The Government’s theory is this: In enacting the CTA, “Congress concluded that collecting beneficial ownership information ‘is needed to . . . protect vital Unite[d] States national security interests’; ‘better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity’; and ‘bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.’” (Doc. 24-1 at 27) (quoting
And because the Executive Branch agrees with Congress about the “necessity” of the CTA, says the Government, “there is a rational relationship between FinCEN’s collecting limited beneficial ownership and applicant information and advancing the national security and foreign policy interests of the United States.” Id. The Government also contends that the Court should defer to the political branches’ policy determination that compliance with international financial standards is best achieved through the CTA, and that the CTA is within Congress’ foreign affairs and national security powers because foreign parties use domestic
shell companies to harm the United States’ interests. (Doc. 40 at 8). Not only that, but “the Court must defer to the political branches on these matters, not to advocacy groups or private citizens.” Id. at 28 (emphasis added).
The Government is absolutely right to say that courts should defer to the political branches on matters of policy. As a matter of first principles, “[t]he conduct of the foreign relations of our government is committed by the Constitution to the executive and legislative—‘the political’—departments of the government.” Oetjen v. Cent. Leather Co., 246 U.S. 297, 302 (1918). This is so not only because foreign policy “should be undertaken only by those directly responsible to the people whose welfare they advance or imperil,” but because “the Judiciary has neither aptitude, facilities nor responsibility” for those policies. Chicago & S. Air Lines v. Waterman S. S. Corp., 333 U.S. 103, 111 (1948). Thus, judicial deference to the political branches is most stringently required in the arena of foreign affairs.
All the same, the Court’s “deference in matters of policy cannot . . . become abdication in matters of law,” and its “respect for Congress’s policy judgments thus can never extend so far as to disavow restraints on federal power that the Constitution
powers are different from its domestic powers in at least one important way: the enumerated powers limitation “is categorically true only in respect of our internal affairs.” United States v. Curtiss-Wright Exp. Corp., 299 U.S. 304, 315-16 (1936).
In any event, Congress is bound by the Constitution’s enumerated powers limitation here, because incorporation is an internal affair. It is blackletter law that “[c]orporations are creatures of state law.” Cort v. Ash, 422 U.S. 66, 84 (1975), abrogated on other grounds by Touche Ross & Co. v. Redington, 442 U.S. 560 (1979). In fact, “[n]o principle of corporation law and practice is more firmly established than a State’s authority to regulate domestic corporations.” CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 89 (1987) (holding that federal securities law did not preempt state law regulating corporate takeovers).
At the Constitutional Convention of 1787, both James Madison and Thomas Pinkney proposed granting powers of incorporation to the federal government. 2 M. Farrand, Records of the Federal Convention of 1787, at 325 (1911). The defenders of these proposals made similar arguments to those the Government makes in defense of the CTA. James Wilson, for instance, claimed that federal incorporation was “necessary to prevent a State from obstructing the general welfare.” Id. at 615. Even so, these proposals were rejected outright. Id. at 616. Although the Founders “were aware that leaving business regulation primarily to the individual states might cause friction within the overall American economy[, t]hey were more reluctant . . .
to allow concentrations of economic power, which they visualized as a government-sponsored monopoly, and therefore chose” to leave incorporation to the States. Allen D. Boyer, Federalism and Corporation Law: Drawing the Line in State Takeover Regulation, 47 Ohio St. L.J. 1037, 1041 (1986).
Apart from quasi-public corporations like the Tennessee Valley Authority and Amtrak (which were formed by acts of Congress), the Founders’ deliberate choice to leave general incorporation to the States has gone unchanged, even at times when calls for federal incorporation were at a fever pitch and Congress was perhaps most willing to upset the balance of state and federal power. For instance, Congress rejected twenty bills to establish federal incorporation between 1903 and 1914 alone. Id. at 1049.
To be sure, the CTA is not a direct regulation of corporate formation. There are no preemption or commandeering concerns here, contra (Doc. 23-1 at 21 n.9), because the CTA does not establish general federal incorporation or force States to demand beneficial owner and applicant information as a filing requirement for incorporation; rather, the CTA is a federal reporting requirement imposed on entities that voluntarily incorporate. Thus, the operative question in light of “[t]he underlying assumptions of our dual form of government,” Kelly v. Robinson, 479 U.S. 36, 49 n.11 (1986) (citation omitted), is whether Congress’ Foreign Affairs powers justify the CTA’s regulation of “creatures of state law,” which are ordinarily
within the sovereign purview of the States. Cort, 422 U.S. at 84. In this case, the answer is no.
The Supreme Court’s unanimous decision in Bond v. United States is instructive. 572 U.S. 844 (2014). In Bond, a woman inflicted “irritating” but ultimately harmless chemical burns on her husband’s mistress. Id. at 861. For that, Bond was prosecuted and convicted for violating the
On appeal, the Supreme Court overturned Bond’s conviction, ruling that the Chemical Weapons Act did not “reach purely local crimes.” Id. at 860. Instead, the Court held that because “our constitutional structure leaves local criminal activity primarily to the States,” courts “have generally declined to read federal law as intruding on that responsibility, unless Congress has clearly indicated that the law should have such reach.” Id. at 848. Thus, absent a clear indication from Congress, the Court concluded that Congress’ treaty powers did not extend to Bond’s “unremarkable” and “purely local” offense. Id.
Although Bond’s central question was one of statutory (rather than Constitutional) interpretation, the logical parallels between Bond and this case are obvious. For starters, Congress’ treaty and foreign affairs powers are closely related. And like local criminal law, corporate formation has always been the province of the States. So although the CTA does not directly interfere with or commandeer State incorporation practices, the CTA still “convert[s] an astonishing amount of traditionally local . . . conduct into a matter for federal enforcement, and involve[s] a substantial extension of federal police resources.” Id. at 863 (internal quotation marks omitted).
The CTA also cannot be justified as necessary and proper to carry out Congress’ foreign affairs powers. When Congress invokes the
The Court can find little support in history or precedent for that position. The only support, in fact, seems to be the CTA’s congressional findings, including the finding that “malign actors seek to conceal their ownership of [corporate] entities in the United States to facilitate illicit activity, . . . harming the national security interests of the United States and allies of the United States.” (Doc. 24-1 at 26-28) (quoting
The Government also asserts that the
Compliance with international standards may be good policy, but it is not enough to make the CTA “necessary” or “proper.” As admirable as Congress’ goals may be, this Court’s only job is to consider whether the CTA follows the Constitution, not whether it is good policy. See Lester v. United States, 921 F.3d 1306, 1318 (11th Cir. 2019) (quoting Marbury v. Madison, 5 U.S. 137, 177 (1803)) (courts must “‘say what the law is,’ not what it should be.“). The law is clear on this much: the
The Government’s reading of the
Given the limits on Congress’ authority under the
2. Commerce Clause
The Government also says that the CTA is within Congress’ power under the
Although “the path of” Commerce Clause jurisprudence “has not always run smooth . . . it is now well established that Congress has broad authority under the Clause.” NFIB, 567 U.S. at 549. The Supreme Court has identified “three broad categories of activity that Congress may regulate under its commerce power.” United States v. Morrison, 529 U.S. 598, 608 (2000).
In the Government’s view, the CTA’s regulations fit squarely within all three categories: (1) the channels of interstate and foreign commerce, (2) the instrumentalities of, and things and persons in, interstate and foreign commerce, and (3) activities that have a substantial effect on interstate and foreign commerce. (Doc. 24-1 at 28); see Morrison, 529 U.S. at 609. For brevity’s sake, and in line with the Government’s arguments, the Court addresses the channels and instrumentalities of commerce as a single category.
a) Channels and Instrumentalities of Commerce
First, the Government says the CTA is a valid regulation of the channels and instrumentalities of commerce because “[b]oth the record and common sense indicate that entities constituting CTA reporting companies frequently utilize the channels of interstate commerce.” (Doc. 24-1 at 33). Yet this argument can’t be reconciled with the plain text of the CTA.
It is “well-settled” that Congress has the power to regulate “those who use the channels of interstate commerce in order that those channels will not become the means of promoting or spreading evil, whether of a physical, moral or economic nature.” United States v. Orito, 413 U.S. 139, 144 (1973). The channels of commerce are “interstate transportation routes through which persons and goods move.” United States v. Ballinger, 395 F.3d 1218, 1225 (11th Cir. 2005) (quoting Morrison, 529 U.S. at 613 n.5). These transportation routes “include highways, railroads, navigable waters, and airspace, as well as telecommunications networks, and national securities markets.” Id. at 1225-26 (cleaned up and collecting cases).
Congress can also “regulate and protect the instrumentalities of interstate
The plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity. The CTA applies to “reporting companies,” defined (with a list of exceptions) as entities “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”
The Government points to the Supreme Court’s decisions in California Bankers Ass‘n v. Shultz and American Power & Light Co. v. Sec. & Exch. Comm‘n to prove that reporting entities “frequently use the channels of commerce[, so] Congress can impose conditions on that use.” (Doc. 40 at 13). The Government reads those cases too broadly.
In Shultz, banks and bank customers sought to enjoin the enforcement of reporting and record keeping requirements authorized by the Bank Secrecy Act and promulgated by the Treasury Department. Cal. Bankers Ass‘n v. Shultz, 416 U.S. 21, 25-26 (1974). First, the Shultz plaintiffs challenged the Treasury Department’s requirement that banks maintain copies of each check for more than $100, as well as “extension[s] of credit in an amount exceeding $5,000 except those secured by interest in real property,” as well as any “advice, request, or instruction . . . regarding the transfer of funds, currency, or other money or credit in amounts exceeding $10,000 to a person, account, or place outside the United States.” Id. at 34.
Second, the Shultz plaintiffs challenged the BSA’s requirement that “anyone connected with the transportation into or out of the country of monetary instruments exceeding $5,000 on any one occasion” must report the transaction. In tandem, they also challenged the BSA’s grant of authority to the Treasury Secretary “to prescribe regulations requiring residents and citizens of the United States, as well as nonresidents in the United States and doing business therein, to maintain records and file reports with respect to their transactions and relationships with foreign financial agencies.” Id. at 36-37.
Third, the Shultz plaintiffs challenged the Treasury Secretary’s requirement “that financial institutions file” a report “for each deposit, withdrawal, exchange of currency, or other payment or transfer ‘which involves a transaction in currency of more than $10,000.’” Id. at 39.
Shultz is not on point for two reasons. First, Shultz did not address Congress’
The reporting and record-keeping requirements at issue in Shultz were upheld largely because they governed negotiable instruments and money actually moving in foreign and interstate commerce. As the Shultz Court concluded, Congress “was not limited to any one particular approach to effectuate its concern that negotiable instruments moving in the channels of [interstate] commerce were significantly aiding criminal enterprise.” Id. at 46. Further, the BSA’s requirements were imposed on banks, not bank customers, because “Congress recognized that the use of financial institutions, both domestic and foreign, in furtherance of activities designed to evade the regulatory mechanisms of the United States, had markedly increased.” Id. at 38.
In sum, Shultz doesn’t stand for the principle that Congress may regulate an entire class whenever some sub-class engages in commerce; Shultz affirms that Congress may regulate a class’s use of the channels and instrumentalities of commerce based on the activities of a sub-class. That is why Congress “could have made the transmission of the proceeds of any criminal activity by negotiable instruments in interstate or foreign commerce a separate criminal offense . . . [or] required that each individual engaging in the sending of negotiable instruments through the channels of commerce maintain a record of such action.” Id. at 47 (emphasis added). But that is as far as Shultz goes.
American Power & Light Co. v. Sec. & Exch. Comm‘n further proves the point. 329 U.S. 90 (1946). There, two public utility holding companies challenged congressional authority to enact the
The Supreme Court affirmed the constitutionality of the act, noting first that the challenged statute was “directed solely to public utility holding company systems that use[d] the channels of interstate commerce.” 329 U.S. at 100. The Court held that:
Congress, of course, has undoubted power under the commerce clause to impose relevant conditions and requirements on those who use the channels of interstate commerce so that those channels will not be conduits for promoting or perpetuating economic evils. Thus to the extent that corporate business is transacted through such channels, affecting commerce in more states than one, Congress
may act directly with respect to that business to protect what it conceives to be the national welfare. It may prescribe appropriate regulations and determine the conditions under which that business may be pursued.
Id. at 99-100 (emphasis added) (citations omitted).
Thus, the Government misses the mark when it argues that the
These cases also illustrate how easily Congress could have written the CTA to pass constitutional muster. For instance, nothing in Shultz or American Power & Light Co. would bar Congress from imposing the CTA’s disclosure requirements on State entities as soon as they engaged in commerce, or from prohibiting the use of interstate commerce to launder money, “evade taxes, hide . . . illicit wealth, and defraud employees and customers.”
But that is not what the CTA does. Because the CTA doesn’t regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose, it cannot be justified as a valid regulation of those channels and instrumentalities.
b) Substantial effect on Interstate and Foreign Commerce
The Government also says that the CTA is within Congress’ commerce power because “Congress rationally concluded that the ability of certain legal entities to withhold beneficial ownership and applicant information, taken in the aggregate, substantially affects interstate commerce.” (Doc. 24-1 at 29) (cleaned up). Indeed, Congress has broad Commerce Clause power “extend[ing] to activities that have a substantial effect on interstate commerce,” including “activities that do so only when aggregated with similar activities of others.” NFIB, 567 U.S. at 549 (internal quotation marks omitted).
In brief, this “substantial effects” doctrine allows Congress to regulate purely intrastate, non-economic activity that (1) has a substantial effect on interstate commerce in the aggregate, when (2) the regulation is in the service of a comprehensive statute that regulates commercial activity on its face, and (3) regulation of the non-economic, non-commercial activity is necessary to make the broader regulation
First, the future activities of state entities are not enough to invoke Congress’ “substantial effects” commerce powers. Even a near certainty of future conduct is insufficient—“[t]he Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions.” NFIB, 567 U.S. at 557. Congress may “anticipate the effects on commerce of an economic activity,” but it has never been “permitted . . . to anticipate that activity itself in order to regulate individuals not currently engaged in commerce.” NFIB, 567 U.S. at 549. The Supreme Court’s commerce-clause jurisprudence has always “involved preexisting economic activity.” Id.
If future activities are off the table, a substantial effects justification for the CTA is limited to two possibilities: either (1) entity formation itself is a commercial activity that substantially affects interstate commerce, or (2) the fact that “many entities subject to the CTA do engage in interstate commercial activity” is enough to extend the Commerce power to a regulation of incorporated entities. (Doc. 24-1 at 30) (emphasis added). The Government wisely hangs its hat on the latter option and concedes that “[i]t is the activities of these entities, not the mere fact that they submitted documents to a Secretary of State, that implicates the Commerce Clause and permits Congress to exercise its authority.” (Doc. 40 at 12).
That brings us to the central question: Does Congress have authority under the Commerce Clause to regulate non-commercial, intrastate activity when “certain entities, which have availed themselves of States’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce?” (Doc. 40 at 11). The Supreme Court’s Commerce Clause decisions all point to the same conclusion: No.
For starters, “the most telling indication of [a] severe constitutional problem . . . is the lack of historical precedent for Congress’s action.” NFIB, 567 U.S. at 549. The Court cannot find, and the parties have not identified, any other State or federal law like the CTA. The Government correctly points out that Congress routinely requires entities to submit information to the government without a suspicion of wrongdoing, but the cases it cites in support are not on point. (Doc. 40 at 11) (citing Helvering v. Mitchell, 303 U.S. 393, 399 (1938) (upholding statute criminalizing tax evasion as an exercise of Congress’ enumerated taxing power); and Elec. Bond & Share Co. v. SEC, 303 U.S. 419, 432-33, 437 (1938) (upholding public utility holding company regulation where petitioners conceded that their corporate structure and operations “involve[d] continuous and extensive use of the mails and instrumentalities of interstate commerce.“)).
Furthermore, “[i]n addition to being a historical anomaly,” Seila L. LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183, 2202 (2020), the CTA runs into trouble because it is not a facial regulation of commercial activity, a hallmark of valid substantial effects legislation. United States v. Morrison, 529 U.S. 598, 613 (2000). As already noted, the Government concedes that “submitt[ing] documents to a Secretary of State” does not “implicate[] the Commerce Clause.” (Doc. 40 at 12). Thus, the Government’s real argument is that the connection between the act of incorporation and the activities Congress sought to curb through the CTA is strong enough to “permit[] Congress to exercise its authority.” Id. But the connection between incorporation and criminal activity is far too attenuated to justify the CTA. Indeed, if such an attenuated connection were enough, Congress’ commerce powers would be functionally limitless.
The Supreme Court’s decision in United States v. Morrison is helpful on this point: Congress, it said, can validly regulate intrastate activity where the regulated activity is “economic in nature.” Morrison, 529 U.S. at 613. The Morrison Court considered a challenge to a provision of the
In defense of the law, the government asserted that it fell within Congress’ substantial effects commerce power, arguing that “gender-motivated violence affect[ed] interstate commerce by deterring potential victims from traveling interstate, from engaging in employment in interstate business, and from transacting with business, and in places involved in interstate commerce; [and] by diminishing national productivity, increasing medical and other costs, and decreasing the supply of and the demand for interstate products.” Morrison, 529 U.S. at 615 (cleaned up).
The Morrison Court rejected the government’s substantial effects justification, in large part because “the but-for causal chain from the initial occurrence of violent crime . . . to every attenuated effect upon interstate commerce” would expand Congress’ power far beyond constitutional boundaries. Id. The chief indicator of this excessive attenuation was that “[i]f accepted, [the government’s] reasoning would allow Congress to regulate any crime as long as the nationwide, aggregated impact of that crime has substantial effects on employment, production, transit, or consumption.” Id.
The Morrison Court also observed that although there is no “categorical rule against aggregating the effects of any noneconomic activity in order to decide these cases,” the Supreme Court has “upheld Commerce Clause regulation of intrastate activity only where that activity is economic in nature.” Id. at 613. And because “[g]ender-motivated crimes of violence are not, in any sense of the phrase, economic activity,” the Court concluded that aggregation of effects was not permissible. Id.
Finally, as the Supreme Court later explained, the cause of action created by the
In Gonzalez v. Raich, the Supreme Court applied Morrison’s “clear pattern of
Unlike the Plaintiffs here, the Raich plaintiffs did “not dispute that passage of the CSA, as part of the
On those narrow grounds, the Raich Court held that the CSA was a valid exercise of Congress’ commerce power because, unlike the domestic violence at issue in Morrison, growing marijuana even in small amounts was a “quintessentially economic” activity, defined as “the production, distribution, and consumption of commodities.” Id. at 25-26 (citation omitted). Thus, “[b]ecause the CSA . . . directly regulate[d] economic, commercial activity . . . Morrison cast[] no doubt on its constitutionality.” Id. at 26.
Leaning on the legislative purpose of the CTA, the Government asserts that Raich governs here because Congress similarly sought to regulate “quintessentially economic” activities through the CTA. (Doc. 24-1 at 31). Such activities include the “use [of] shell companies to evade taxes, hide . . . illicit wealth, and defraud employees and customers,” as well as money laundering.
Even so, the Government has conceded that the act of incorporation is not enough to invoke the Commerce power, so it runs into the same problem here as it does elsewhere—the plain text of the CTA does not regulate the quintessentially economic activities the Government asserts or require entities to engage in those activities to be regulated. As repeatedly shown, incorporation is “in no sense an economic activity that might, through repetition elsewhere, substantially affect any sort of interstate commerce.” Lopez, 514 U.S. at 567.
Here, as in Morrison, “the but-for causal chain from” incorporation “to every attenuated effect upon interstate commerce” is too attenuated to be justified under the Commerce Clause. Morrison, 529 U.S. at 615. Courts may not “pile inference upon inference in a manner that would bid fair to convert congressional authority under the Commerce Clause to a general police power of the sort retained by the States.” Lopez, 514 U.S. at 567. Thus, “[n]o matter how inherently integrated” corporate formation is with the activities of those entities, “they are not the same
Clause area“). Indeed, such a permissive “view of causation . . . would obliterate the distinction between what is national and what is local in the activities of commerce.” A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 554 (1935).
The Government also justifies the CTA as a “general regulatory statute bearing a substantial relation to commerce.” (Doc. 40 at 11-12) (citing Alabama-Tombigbee Rivers Coal. v. Kempthorne, 477 F.3d 1250, 1273 (11th Cir. 2007)). It is true that Congress has “substantial leeway to regulate purely intrastate activity (whether economic or not) that it deems to have the capability, in the aggregate, of frustrating the broader regulation of interstate economic activity.” United States v. Maxwell, 446 F.3d 1210, 1215 (11th Cir. 2006). Congress’ “substantial leeway” includes the “aggregation of economic effects . . . where the federal action in question is “an essential part of a larger regulation of economic activity, in which the regulatory scheme could be undercut unless the intrastate activity were regulated.“” Alabama-Tombigbee Rivers Coal., 477 F.3d at 1272 (quoting Lopez, 514 U.S. at 561).
There are three problems with this argument. First, the “comprehensive regulatory scheme” framework does not apply to a “single-subject statute whose single subject is itself non-economic.” Maxwell, 446 F.3d at 1216 n.6 (noting that appellant was “challeng[ing] a component of a broader regulatory scheme whose subject [was] decidedly economic.“). The CTA is just such a statute. As already shown, it is not enough that some sub-class of entities engage in illicit, commercial, or economic activity. Nor are legislative statements that the CTA is a “comprehensive bipartisan reform of . . . anti-money laundering laws” enough to make it so. (Doc. 24-1 at 30-31) (quoting 166 Cong. Rec. S7289, S7309 (Dec. 9, 2020) (statement of Sen. Brown)).
Rather, unlike a “constitutionally “comprehensive“” statute that “regulate[s] an entire market for a commodity,” the CTA regulates entities, owners, and applicants that incorporate an entity with their state, an “isolated, discrete act[]” like the statutes “that were the subject of regulation in Lopez and Morrison.” Maxwell, 466 F.3d at 1217 n.7. In other words, incorporation is a single, discrete action far closer to “possession of a gun in a school zone or gender-motivated violence” than a general regulation of controlled substances. Id. at 1216 n.6.
Second, the Government‘s argument misses that the “essential part of a larger regulation” analysis typically comes into play when assessing whether an exercise of the Commerce power is necessary and proper, not whether the exercise itself is within Congress’ Commerce power. See NFIB, 567 U.S. at 558-59 (treating the Commerce Clause and Necessary and Proper Clause analyses as distinct inquiries). The “comprehensive regulatory scheme” analysis “poses a problem for . . . as-applied challenge[s], because when a general regulatory statute bears a
Once again, these arguments simply do not address the fact that the CTA does not regulate economic or commercial activity on its face. More than that, the Government‘s core cases on this point all involve statutes that did facially regulate commerce. See, e.g., Raich, 545 U.S. at 15 (noting that there was no “dispute that passage of the CSA . . . was well within Congress’ commerce power.“); Maxwell, 446 F.3d at 1212 (rejecting as-applied challenge to
Third, the Government‘s argument that the CTA is necessary and proper to carry out a legitimate exercise of Congress’ commerce powers fails because the CTA is far from essential. Alabama-Tombigbee Rivers Coal., 477 F.3d at 1272. FinCEN‘s 2016 Customer Due Diligence rule requires “covered financial institutions” to “identify and verify beneficial owners of legal entity customers.”
The CDD rule defines beneficial owner broadly as well: “Each individual . . . who owns, directly or indirectly, 25 percent or more” of the entity; has “significant responsibility to control, manage, or direct a legal entity,” including “a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)” and “[a]ny other individual who regularly performs similar functions.”
To be clear, FinCEN‘s CDD rule and the CTA provide FinCEN with nearly identical information, but the CDD rule does so in a constitutionally acceptable manner. See Shultz, 416 U.S. at 49 (approving similar bank record-keeping requirements). Even the CTA itself acknowledges the similarity. See
Even at the outer limits of the Necessary and Proper Clause, the practical similarities between these two regulations
Finally, as our analysis began with the text, so too does it end with it. Octane Fitness, 572 U.S. at 553. And the text of the CTA is missing a crucial component of valid substantial effects legislation: it “has no express jurisdictional element which might limit its reach to a discrete set of [activities] that additionally have an explicit connection with or effect on interstate commerce.” Lopez, 514 U.S. at 562; see also
The absence of a jurisdictional hook from the CTA is even more mystifying because Congress knows how to include one when it wants to. So commonplace are these jurisdictional phrases that, for purposes of statutory interpretation, courts assume that “Congress uses different modifiers to the word “commerce” in the design and enactment of its statutes.” Cir. City Stores, Inc. v. Adams, 532 U.S. 105, 115 (2001). When Congress legislates pursuant to its Commerce Clause authority, “[t]he phrase “affecting commerce” indicates Congress’ intent to regulate to the outer limits of its authority under the Commerce Clause,” while “the general words “in commerce” and the specific phrase “engaged in commerce” are understood to have a more limited reach.” Id.
There are many examples of this principle, including a recent Eleventh Circuit case which upheld
Faced with the loud silence of the text, the Government argues that Congress meant to regulate interstate and foreign commerce in the CTA: “The CTA is authorized based on the undisputed facts that certain entities, which have availed themselves of States’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce.” (Doc. 40 at 11); see also id. (citing to Congressional findings and legislative history); and (Doc. 24-1 at 29) (citing Congressional findings
In any event, what Congress intended to do is not the Court‘s animating concern, because “it is ultimately the provisions of our laws rather than the principal concerns of our legislators by which we are governed.” Oncale v. Sundowner Offshore Servs., Inc., 523 U.S. 75, 79 (1998). Of course, the presumption that Congressional action is constitutional gives the CTA a significant head start. United States v. Ruggiero, 791 F.3d 1281, 1284 (11th Cir. 2015). And yet even with that head start, “the most formidable argument[s] concerning the statute‘s purposes c[an] not overcome the clarity [found] in the statute‘s text.” Kloeckner v. Solis, 568 U.S. 41, 55 n.4 (2012). Congress, for good or ill, “says in a statute what it means and means in a statute what it says.” Carcieri v. Salazar, 555 U.S. 379, 392 (2009).
As for appeals to congressional findings, “the existence of congressional findings is not sufficient, by itself, to sustain the constitutionality of Commerce Clause legislation. Simply because Congress may conclude that a particular activity substantially affects interstate commerce does not necessarily make it so.” Morrison, 529 U.S. at 614 (cleaned up). On the contrary, “[w]hether particular operations affect interstate commerce sufficiently to come under the constitutional power of Congress to regulate them is ultimately a judicial rather than a legislative question, and can be settled finally only by this Court.” Lopez, 514 U.S. at 557 n.2, (alteration in original) (quoting Heart of Atlanta Motel, Inc. v. United States, 379 U.S. 241, 273 (Black, J., concurring)). And congressional findings lose their weight in the face of the Government‘s failure to articulate limiting principles for its Commerce Clause arguments, which makes “the concern . . . that Congress might use the Commerce Clause to completely obliterate the Constitution‘s distinction between national and local authority seem[] well founded.” Morrison, 529 U.S. at 615. As a result, “Congress’ findings are substantially weakened by the fact that they rely so heavily on a method of reasoning that [courts] have already rejected as unworkable if we are to maintain the Constitution‘s enumeration of powers.” Id.
All the same, maybe Congress’ omission of a jurisdictional hook from the CTA was just inartful drafting. No matter, “it is beyond [the Court‘s] province to rescue Congress from its drafting errors, and to provide for what we might think is the preferred result.” Lamie v. U.S. Tr., 540 U.S. 526, 542 (2004) (cleaned up); see also Arizona v. Mayorkas, 143 S. Ct. 478, 479 (2022) (Gorsuch, J., dissenting) (observing that federal courts are “court[s] of law, not policymakers of last resort.“). Because “[i]t is emphatically the province and duty of” this Court to interpret the law, not write it, the Court cannot amend the CTA to include a jurisdictional hook. Marbury, 5 U.S. at 177. Only Congress can do that.
Because the CTA does not regulate commerce on its face, contain a jurisdictional hook, or serve as an essential part of a comprehensive regulatory scheme, it falls outside Congress’ power to regulate non-commercial, intrastate activity.
C. Taxing Power & Necessary and Proper Clause
The Court turns finally to the Government‘s argument that the CTA is justified
The Government first argues that Plaintiffs have conceded the CTA may be a proper application of Congress’ taxing power, and so their facial challenge must fail. (Doc. 40 at 14) (citing United States v. Salerno, 481 U.S. 739, 745 (1987)). That is a misreading of Plaintiffs’ brief, which said that “[i]f Congress were to limit use and access of the FinCEN database to tax collection purposes, it might be justified under the Necessary and Proper Clause as rationally related to the Taxing Power.” (Doc. 39 at 21). That statement does not amount to a concession that the CTA might actually be a valid exercise of the taxing power.
Moving on, the Plaintiffs do not dispute Congress’ power to levy taxes. See
Instead, the Government posits that “the collection of beneficial ownership information is necessary and proper to ensure taxable income is appropriately reported,” and that Congress recognized this relationship by “draft[ing] the CTA to allow “[o]fficers and employees of the Department of the Treasury [to] obtain access to beneficial ownership information for tax administration purposes[.]“” (Doc. 24-1 at 36-37) (quoting
Although the relationship between disclosure provisions and the taxing power is “well recognized,” (Doc. 40 at 15), the cases relied on by the Government illustrate that providing access to the CTA‘s database for tax administration purposes is not enough to establish a sufficiently close relationship here. See Helvering, 303 U.S. at 399 (noting that tax return disclosure requirements are an exercise of the taxing power itself); Kramer, 2008 WL 313827, at *3 (holding that a federal occupational tax and registration requirement for gun manufacturers, dealers, and importers was a “legitimate exercise[] of Congress’ taxation power“).
As previously discussed, the Necessary and Proper Clause will not justify an act of Congress unless it “involve[s] exercises of authority derivative of, and in service to, a granted power.” NFIB, 567 U.S. at 560. Thus, Congress’ broad authority under the Necessary and Proper Clause depends on the force and vigor of Congress’ enumerated powers for its existence. Put plainly, “[w]hen the inquiry is whether a federal law has sufficient links to an enumerated power to be within the scope of federal authority, the analysis depends
The chain here is weak indeed. It would be a “substantial expansion of federal authority” to permit Congress to bring its taxing power to bear just by collecting “useful” data and allowing tax-enforcement officials access to that data. NFIB, 567 U.S. at 560. Read that way, the Necessary and Proper Clause would sanction any law that provided for the collection of information useful for tax administration and provided tax officials with access. All Congress would have to do to craft a constitutional law is simply impose a disclosure requirement and give tax officials access to the information.
That kind of unfettered legislative power “is in no way an authority that is “narrow in scope,” or “incidental” to the exercise of the commerce power.” Id. (citations omitted). Thus, “even if” the CTA‘s provisions were “necessary,” “such an expansion of federal power is not a “proper” means for making those [policy goals] effective.” Id.
IV. CONCLUSION
The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments.
For these reasons, the Plaintiffs are entitled to summary judgment as a matter of law. The Court GRANTS the Plaintiffs’ Motion for Summary Judgment (Doc. 23) and DENIES the Defendant‘s Motion to Dismiss or Alternative Cross Motion for Summary Judgment (Doc. 24). The Court will separately issue a final judgment.
DONE and ORDERED March 1, 2024.
LILES C. BURKE
UNITED STATES DISTRICT JUDGE