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BLOG / 04.01.24 /Kenneth R. Jacobs

Alabama Federal District Court Declares Corporate Transparency Act Unconstitutional

Earlier this month, a federal court in Alabama ruled that the Corporate Transparency Act (“CTA” – See our January E-blast) was unconstitutional as applied to the plaintiffs, the National Small Business Administration and associated individuals. According to the court, the disclosure requirements for officers and directors in the CTA exceeded the government’s federal powers.

The government argued that the disclosure requirements in the Act flowed from the government’s right to regulate interstate commerce; its jurisdiction over national security and foreign affairs; and its taxing authority. However, the court found that “incorporation” of a business (which triggers the disclosure requirements for individual principals) is a purely local act, with no effect on interstate commerce. Likewise, the national security justification was based solely on a Congressional finding that “malign actors…seek to conceal their ownership of [U.S. entities];” the court determined that such a vague finding did not justify regulating purely domestic activities like forming a business. Finally, although the court acknowledged that the Act’s disclosure obligations could have been linked legitimately to the government’s taxing power, it found no such language in the Act. Read the full decision.

The Alabama court decision only applies to the plaintiffs named in that case. Unlike some other 5^th Circuit courts, here the Alabama Court did not purport to issue a nationwide injunction or expand the decision to include other entities. The government has appealed the decision, but the CTA compliance clock is still running. Stay tuned.

Implications: This decision implicitly supports the efforts of cooperatives and HOA’s to delay compliance with the provisions of the Corporate Transparency Act. We can make no predictions as to whether the CTA will be further delayed or modified; during an election year, the Democratic majority may be reluctant to limit a law that the Biden administration supports. We will keep you informed as the case and legislation progresses.

“Eviction for Good Cause” Bills Remain on Agenda in Albany

Assembly and Senate sponsors have reintroduced bills (A4454 and S305) that would bar landlords from refusing to renew leases without “good cause” (e.g., nonpayment, nuisance or other lease violations, or an immediate need for personal use). More important, any rent increase above 3% (or 150% of the CPI increase) per year would be presumed “unreasonable” and grounds for nonpayment unless the landlord could justify the increase. The current bill would apply not just to rental landlords, but also to unit owners and shareholders who lease (or sublease) their apartments.

We lack the space to fully analyze how many ways this bill would hurt real estate owners. It wrongfully applies to condo and cooperative owners. If landlords can’t preserve the ability not to renew a lease with a  “problem tenant” after the first year,  they will screen prospective tenants even more carefully, making the task of finding affordable housing even harder for marginal tenants. Evictions would be significantly delayed while the court reviews tenant claims of unreasonable cause. Annual rent increases would be artificially limited on one hand, and promoted to the maximum level (3%) on the other. Ultimately, the law would further discourage construction of new affordable rental housing and maintenance of existing housing in the name of promoting “tenant stability.”

This year, backers of the Good Cause Eviction bill have made it part of the State Senate’s “One-House Budget” resolution, the Senate’s statement of budgetary goals. They hope that it will be hitched to the budget which is being voted on now. Please urge your local representatives to consider how these bills will affect property values (particularly for owners of small buildings and individual condominium and co-op apartments) before they vote.

Correction: Application of Property Condition Disclosure Act to 1-4 Family Dwellings.

Our January E-blast stated that the new PCDA regulations apply to single-family homes. In fact, they apply to owners of one to four-family homes. Owners should take note accordingly.