unconstitutional

Alabama Federal Court finds Corporate Transparency Act unconstitutional

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While real estate practitioners are struggling to implement office procedures to accommodate the reporting requirements of the new Federal Corporate Transparency Act (CTA), one court has held the Act to be unconstitutional.

National Small Business Association v. Yellen, Case 5:22-cv-1448-LCB (U.S. District Court, Northern District of Alabama, March 1, 2024) held that the Constitution does not give Congress the power to regulate millions of entities and their stakeholders the moment they obtain formal corporate status from a state.  The government had argued that the foreign affairs power and the Commerce Clause grant the requisite authority because the purpose of the CTA is to prevent money laundering and tax evasion, especially by offshore actors.

The case begins with this language, “The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL.”  In other words, the Constitution does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. This opinion states that the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Even in the pursuit of sensible and praiseworthy ends, Congress may enact smart laws that violate the Constitution. This case illustrates that principle, according to the Northern District of Alabama.

We’ll have to wait and see how appellate courts address this issue. In the meantime, we’ll have to comply!

Supreme Court to hear CFPB Challenge

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Seila Law, LLC v. Consumer Financial Protection Bureau likely to be heard by mid-2020

CFPB building

The United States Supreme Court announced on Friday, October 18, that it will hear a case challenging the constitutionality of the Consumer Financial Protection Bureau. The allegation in question is that the structure of the agency grants too much power to its director, in violation of the Constitution’s separation of powers doctrine.

Under the current structure, the director of the CFPB cannot be fired by the president absent “inefficiency, neglect of duty, or malfeasance in office.” The heads of other federal agencies may be removed at the pleasure of the president.

The order posted by the Court last Friday requested that both sides address whether the CFPB can remain in effect if its structure is found to be unconstitutional.

Concern about the structure of the agency has been voiced since its inception based on the fact that such huge power has been placed in the hands of one individual director. The argument continues that the CFPB has more power than any agency ever created by Congress. While most federal agencies are controlled by commissions or by a director who serves at the pleasure of the President, the CFPB’s sole director is removable only for cause. Also, since all of the funding of the agency is not controlled by Congress, there is little legislative oversight.

In previous hearings, when the CFPB has been asked what the appropriate remedy should be if the structure of the agency is held to be unconstitutional, the CFPB has maintained that formative statute would have to be amended to allow the President to remove the director with or without cause.  Some have suggested that all of the actions of the CFPB might be suspect if its structure is held unconstitutional. Others have suggested that agency should be headed by a multi-person, bi-partisan commission rather than a single director for greater transparency and accountability.

If a decision in the case is announced in mid-2020, the presidential election could be affected since Sen. Elizabeth Warren’s role in creating the agency is a central pillar of her presidential bid.

Justice Brett Kavanaugh has made clear in a previous dissent that he believes the structure of the agency is unconstitutional.