Hughes Hubbard Reps NSBA’s Constitutional Challenge to Corporate Transparency Act; Important Decision Rules Act Unconstitutional

March 2, 2024 – Hughes Hubbard represented the National Small Business Association (NSBA) in its constitutional challenge to the Corporate Transparency Act (CTA). In an important decision issued late Friday, March 1, Judge Liles Burke of the U.S. District Court in Huntsville, Ala., ruled that the Corporate Transparency Act is not authorized by the Constitution, as it exceeds the powers granted to Congress by the U.S. Constitution.

The National Small Business Association and its member, small business owner Isaac Winkles, brought the suit challenging the CTA, represented by Hughes Hubbard special counsel Thomas Lee and partner Terence Healy, with co-counsel John Neiman of Maynard Nexsen.

“In our view, Judge Burke correctly ruled that, while well intentioned, the CTA exceeds the powers given to Congress by the Constitution. This was a high-stakes Constitutional litigation involving an unprecedented federal statute with broad potential impact,” said Lee. “The National Small Business Association brought the only challenge to the law despite many who criticized it. We are delighted with the outcome, and proud to represent the National Small Business Association in its campaign.”

On Nov. 15, 2022, NSBA filed suit in the Northern District of Alabama, alleging that the Corporate Transparency Act exceeded Congress' Article I constitutional powers and infringed upon individual constitutional rights by forcing ordinary Americans to hand over sensitive, personal information to a Financial Crimes Enforcement Network (FinCEN) law-enforcement database. NSBA sought an immediate injunction against the implementation of the CTA and FinCEN reporting rules.

The court acknowledged that the ultimate policy goals of the statute, in terms of countering money laundering and terrorism financing, are laudable. But the court concluded that Congress cannot attempt to achieve laudable goals through means that are outside its powers under the Constitution—either because (as the court found) Congress is legislating activities like entity formation that the Constitution leaves to the states, or because (as NSBA also contended) Congress is forcing ordinary and innocent Americans to hand over personal and sensitive information to a database dedicated to criminal investigations even though those citizens have done nothing wrong and there is no reason to suspect that they have.

This is a developing story. The case has so far garnered coverage in The New York Times, The Wall Street Journal, Bloomberg Tax, Forbes, Inc., Reuters, The National Law Review, Law360, The American Lawyer, Wolters Kluwer, American Banker, The Journal of Accountancy, Birmingham Business Journal, Reason, Wealth Management and MoneyLaundering.com.

Based in Washington, D.C., NSBA is a nonpartisan, small business advocacy organization that works to enact access to capital programs and prevent small business tax penalties.

Lee and Healy lead the HHR team, which also includes Shahzeb Lari.