Community associations have been abuzz this past year about the Corporate Transparency Act’s (“CTA”) requirement to report beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”). At first, it seemed that the requirement did not apply to community associations because the Association is not “owned” by the members in the same way that individuals or companies “own” a for-profit corporation. But then, the Federal Government suggested that community associations would have to comply by reporting its directors and any Owners with large ownership shares. For additional information on this requirement generally, please see our article from the beginning of this year here.
As many of you have expressed, reporting the names of owners and directors of a community association doesn’t seem to meet the purpose of the requirement, which is aimed at identifying the “real” owners and controllers of state-established entities for purposes of enforcing federal law. The Community Association Institute (“CAI”) (the national counterpart to WSCAI) agrees and has challenged the BOI reporting requirement in federal court case CAI v. U.S. Department of Treasury (“CAI’s Lawsuit”). While the case is still making its way through the courts, in September of this year, CAI sought an injunction that would essentially allow associations not to file BOI reports until the case was resolved. We all waited with bated breath, but in October, the court denied CAI’s request for an injunction, and essentially determined that community associations must file their BOI reports by the end of 2024. We thought that was the end of the conversation on reporting requirements for 2024 until last week, when a Texas District Court rendered an unexpected decision.
On December 3, 2024, the U.S. District Court for the Eastern District of Texas granted a “nationwide preliminary injunction” in the matter of Texas Top Cop Shop, Inc., et al. v. Garland, et al. The injunction prevents the federal government from enforcing the FinCEN BOI reporting requirement pending further court order (“Texas Injunction”). For those of you who love reading lengthy legal opinions, the full text can be found here. This seems like a big win for those who opposed the requirement, but it’s more complicated, and I expect associations will receive conflicting advice on the issue, so we wanted to do a bit of a deeper dive to let you know the situation so your communities can decide what to do.
There are a couple of issues with the order that make it far less clear what to do now. First, the order is temporary – it could become permanent, but it could also be lifted or modified at anytime.
The second issue has to do with the fact that a Texas court claims to have issued a “nationwide” injunction. Usually, court decisions only affect those people within the jurisdiction of that court, but nationwide injunctions like this one purport to prevent the government from enforcing the requirements against anyone – not just the parties to the lawsuit and not just Texas-based entitles.
While national injunctions are relatively rare (and increasingly controversial as you can see from this Harvard Law Review Article), they are not unprecedented, and, in fact, may be entirely appropriate. But what we don’t know is if the Texas Injunction is later lifted or reversed and the BOI reporting requirement is upheld, can an association be penalized for not complying by January 1, 2025 (the original date of compliance). In other words, can an association be retroactively penalized for relying on this Texas Injunction? The Supreme Court looked at this issue in Edgar v. MITE Corp. but failed to provide a definitive answer – unhelpful, I know!
Of course, the most cautious thing to do would be to comply with the reporting requirement as if the injunction was not in place. So if you’re being advised to continue to file the report, then this may be why – even if retroactive enforcement is unlikely. And I think it is unlikely. This Emory Law Journal article from 2022 provides a more detailed explanation of why retroactive enforcement on a later-lifted injunction is unlikely. However, there risk still exists, so risk-averse associations may choose to file their BOI report (and would be totally justified in doing so). However, if you have one of those communities where the directors staunchly refuse to comply, the ruling may lessen the impact of noncompliance.
We at CALG support CAI’s efforts to get an exemption for community associations, but the truth is there are at least a dozen lawsuits challenging the CTA and the courts are trending toward upholding it. Thus, there is a good chance that your association will ultimately need to file a BOI report, even if it doesn’t need to do so by January 1, 2025. All this is to say that there is a chance that if your association does not file a BOI report by January 1, 2025, the association will need to rush to do so at some point in the next year or so. Given the almost draconian penalties, fines of up to $10,000.00 and up to two years in prison, and the relative risk that associations will need to comply in the future, it is reasonable for an association to file its BOI report as planned, despite the recent Texas Injunction.
If a board chooses not to comply now, it should commit to monitoring the situation and be ready to take action very quickly if the Texas Injunction is lifted, or risk facing steep penalties.
Instructions on how to file the BOI report can be found here.
Best of luck to everyone in navigating this obnoxiously ambiguous position the associations we support find themselves in!
