In September, the Community Associations Institute (“CAI”) filed a lawsuit to challenge the applicability and constitutionality of the Corporate Transparency Act (“CTA”), which mandates board members of community associations to file a beneficial ownership report with the Financial Crimes Enforcement Network (“FinCEN”).
CAI submitted a motion for preliminary injunction to have the application of the CTA paused during pendency of the lawsuit for community associations. CAI argued, amongst other things, that community associations are not avenues for terrorist or money laundering activities unlike layered legal entities or opaque limited liability companies, which are issues that the CTA was intended to address. Board members in community associations are certainly known as they are members within the community, there is no “hiding” their identity, they serve without compensation, and have the same interest in the corporation as any other members.
To succeed on a preliminary injunction, a plaintiff (in this case, CAI) must establish: (a) likelihood to succeed on the merits, (b) suffer irreparable harm, (c) balance of the equities favors the plaintiff, and (d) the injunction is in the public interest.
On October 24, 2024, the Court ruled against CAI. The Court held that the exemptions in the CTA for those entities treated for tax purposes under Section 501(c) does not extend to community associations that are governed by Section 528 of the IRS Code and the CTA does not exempt community associations governed by that Section. Further, the Court held that CAI was unable to show likely irreparable harm from having community associations comply with the CTA because the potential for mass resignations of board members and community association unable to operate is too speculative at this time.
In light of the foregoing, it is imperative that all incorporated community associations consult with legal counsel to ensure compliance with the CTA.
