THIS ISSUE'S HEADLINES

Corporate Transparency Act Ruled Unconstitutional by Federal District Court

High Stakes: Drafting and Interpreting Payment Rejections Under Massachusetts' Prompt Pay Act

Real Estate Title Disputes: The Process of Recording "Lis Pendens" in Rhode Island and Massachusetts


CORPORATE TRANSPARENCY ACT RULED UNCONSTITUTIONAL BY FEDERAL DISTRICT COURT

In an unexpected decision on March 1, 2024, a federal district court ruled that the Corporate Transparency Act ("CTA") is unconstitutional, effectively placing the Beneficial Ownership Information (BOI) reporting on hold.

Background

The CTA was enacted on January 1, 2021, as part of the 2021 National Defense Authorization Act as an attempt to prevent money laundering and tax evasion by requiring new reporting for certain companies doing business in the U.S. The effective date was delayed until January 1, 2024, while final Regulations were being developed.

The purpose of the CTA is to establish reporting requirements for a wide range of business entities and to authorize the Financial Crimes Enforcement Network of the U.S. Department of Treasury ("FINCEN") to maintain a database of all information provided and to disclose such information to government authorities and certain financial institutions. In order to accomplish this, the CTA requires a wide range of business entities to report personal information regarding the individuals who own, control or organize covered entities to FINCEN starting January 1, 2024.

Ruling

In November 2022, the National Small Business Association (SBA; plaintiffs) filed suit against the U.S. Treasury Department to block the requirement that tens of millions of small businesses register with the government alleging the mandatory disclosure requirements exceed Congress' authority under Article I of the Constitution and violate the First, Fourth, Fifth, Ninth, and Tenth Amendments. The lobbying group argued that the reporting rule "is unduly burdensome on small firms, violates privacy and free-speech protections and infringes on states' powers to govern businesses."

The U.S. District Court judge in Alabama sided with the SBA and ruled on March 1, 2024, that the CTA is unconstitutional because it “exceeds the Constitution’s limits on the legislative branch” and fails the “necessary and proper” test.

What's Next?

In all likelihood, the Court's decision will not be the end of the matter for the following reasons:

• The U.S. government is likely to appeal this decision to the U.S. Court of Appeals for the Eleventh Circuit, and may seek an interim stay of the ruling from both the trial and appellate courts;
  
  
• FinCEN may offer comments about the impact of the ruling on CTA implementation and enforcement in the coming days; and
  
  
• It is possible that this ruling will lead to additional suits in other districts.

As the injunction only applies to enforcement of the CTA against the plaintiffs, other reporting companies (who are not plaintiffs in this case) are still bound by the CTA and should continue to comply unless exempt until further notice.

Summary

For the time being, this Court's decision leaves the CTA and BOI landscape in limbo. PLDO has been covering the CTA since it was first passed by Congress and will continue to monitor all developments. To read our last Client Advisory, click here. In the meantime, if you have questions or would like further information about the CTA, please contact PLDO Partner William F. Miller at 508-420-7159 or email wmiller@pldolaw.com.

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HIGH STAKES: DRAFTING AND INTERPRETING PAYMENT REJECTIONS UNDER MASSACHUSETTS' PROMPT PAY ACT

Under the Massachusetts Prompt Pay Act, which governs construction contracts, unless an owner meets the Act's "time and substance" requirements for rejecting a payment application from a contractor (ditto for subcontractors' applications to contractors), that application will be deemed approved. Recently, the Supreme Judicial Court invited input on a question that bears directly on the importance of the wording of any such rejection notice.

As a refresher, the Act established a non-waivable timeline for the payment application process: 30 days for submission; 15/22 days for approval or rejection by an owner or contractor, respectively; and 45 days for payment after approval. The timelines can be shortened by contract, but not extended.

A rejection must contain three specific elements: (1) a statement of the factual basis for which the application (or any part thereof) is being rejected; (2) a statement of the contractual basis for the rejection (i.e., the specific provisions of the contract); and (3) a certification that the rejection is being made in good faith.

The Act means what it says: explain a rejection timely, or the application is deemed to be approved. If an owner or contractor is unable to provide a proper rejection within the allotted 15 or 22 days, respectively, their options are simple: pay the application or expect to be sued. If sued, factual defenses are waived. However, the owner or contractor may later bring any counterclaims they may have against the contractor or subcontractor, such as breach of contract, negligence, fraud, and violation of Chapter 93A.

The Supreme Judicial Court is presently seeking input on whether a defendant that failed to provide a proper rejection should lose its right to assert affirmative defenses, such as "impossibility." However, what is of particular interest — and indeed may be fatal to the defendant contractor — is that impossibility was not listed in the contractor's answer to the complaint being reviewed by the SJC, and apparently was not listed in the contractor's factual or contractual basis for rejecting the payment application.

For property owners, contractors and subcontractors who may find themselves litigating payment rejections under Massachusetts' Prompt Pay Act, the wording of those rejections is critical and may need to include legal theories that may not be front-of-mind for the construction industry professionals who normally draft and receive them. The consequences, however, can be significant. For assistance with drafting or analyzing payment rejections subject to the Prompt Pay Act, please contact PLDO Partner Joel K. Goloskie at (617) 771-1154 or at jgoloskie@pldolaw.com.

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If you or your business ends up in a dispute over real estate, it is likely that you will encounter a lis pendens. Lis pendens is Latin for “suit pending,” and it means just that, it is a statutorily governed legal tool that is often used to give notice on a property’s title that a lawsuit relating to that property is pending. A notice of lis pendens is recorded against the disputed property in the recorder of deeds of the town or city where the property is located, and can hinder the ability to sell, develop or mortgage the property as it puts a notice on the title of a pending lawsuit signaling to the public that there may be an issue with title.

The process of filing a notice of lis pendens is different in Rhode Island and Massachusetts. In Rhode Island court approval is not required. Pursuant to Rhode Island General laws §9-4-9, “[t]he notice shall briefly state the names of all the parties, the court wherein filed, the date of filing, and the substance of the bill, petition, declaration or other complaint, rule, order, decree, or judgment, and a description of the real estate thereby affected, so as far as may be necessary to warn any person subsequently dealing with the title to the land.” Furthermore, within seven days of recording the notice of lis pendens you must mail a copy to the parties named in the action. Id. Once recorded, an aggrieved property owner can file a motion to quash the lis pendens to attempt its removal. Critically, however, if a notice of lis pendens is recorded without basis it could expose the recorded to a slander of title action.

In Massachusetts, the process for recording what is called a memorandum of lis pendens is slightly more complex and requires court approval prior to the recording of the memorandum. Under Massachusetts General Laws c. 184 § 15, a party seeking to record a memorandum of lis pendens must have filed a verified complaint seeking the underlying relief as to the property, then under that action, the party may file a motion for the Court to endorse the memorandum if it makes a finding that “the subject matter of the action constitutes a claim of a right to title to real property or the use and occupation thereof or the buildings thereon.” Once the memorandum is endorsed by the Court, the memorandum along with an affidavit of notice is to be filed with the Recorder of Deeds. An aggrieved party has an immediate right to an appeal of the endorsement of the memorandum and may also file a special motion to dismiss.

In both Massachusetts and Rhode Island, strict compliance with the statutes is required. Non-compliance, as well recording a frivolous notice, could expose you to significant liability. Further, property owners should act swiftly to determine if they have grounds for removal of a lis pendens recorded on their property as such recording could impact the ability to transfer or mortgage the property. For guidance on lis pendens, please contact Attorney Katherine B. Dunn at 401-824-5100 or kdunn@pldolaw.com.

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