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Zhang v. United States Citizenship

United States District Court, District of Columbia

November 30, 2018

HUASHAN ZHANG, et al., Plaintiffs,
v.
UNITED STATES CITIZENSHIP AND IMMIGRATION SERVICES, et al., Defendants.

          MEMORANDUM OPINION

          EMMET G. SULLIVAN UNITED STATES DISTRICT JUDGE.

         I. Introduction

         Almost thirty years ago, Congress established the EB-5 Visa Program (“the Program”) to stimulate the economy and create jobs through foreign capital investment. Under the Program, “alien investors” may become eligible to immigrate to the United States in return for investing certain qualifying amounts of capital in a commercial enterprise in the United States. Plaintiffs in this case are individual alien investors whose EB-5 visa petitions were denied by the agency that oversees the Program: the United States Citizenship and Immigration Services (“USCIS”). Plaintiffs allege that their petitions were denied based on USCIS' flawed interpretation of its own regulation. As such, they challenge USCIS' decisions to deny their petitions as arbitrary and capricious in violation of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706, and the Immigration and Nationality Act (“INA”), 8 U.S.C. § 1153(b)(5). Plaintiffs also claim that USCIS exceeded its statutory authority under the INA by denying their petitions and impermissibly applying its interpretation retroactively. Finally, plaintiffs claim that USCIS engaged in improper rulemaking without notice and comment, also in violation of the APA.

         Pending before the Court are: (1) plaintiffs' motion for summary judgment; (2) USCIS' cross-motion for summary judgment; (3) plaintiffs' motion to certify class; and (4) plaintiffs' motion to amend the complaint. Upon consideration of the motions, the responses and replies thereto, the relevant case law, and the entire record herein, the Court GRANTS IN PART plaintiffs' motion for summary judgment, DENIES USCIS' cross-motion for summary judgment, GRANTS plaintiffs' motion to certify class (albeit with a modified class definition), and DENIES AS MOOT plaintiffs' motion to amend the complaint. Rather than approve plaintiffs' petitions, however, the Court instead VACATES USCIS' denials of the class members' petitions and REMANDS the denials to USCIS for reconsideration consistent with this Memorandum Opinion.

         II. Background

         A. Statutory and Regulatory Background

         The INA authorizes the United States to issue visas to certain qualified immigrants. See Pub. L. No. 101-649 § 121(a) (codified as 8 U.S.C. § 1153(b)(5)(1990)). In 1990, Congress created the EB-5 Visa Program as one of five categories of employment-based immigration preferences to “create new employment for U.S. workers and to infuse new capital into the country.” S. Rep. No. 101-55, at 21 (1989). To be eligible for an EB-5 visa, an alien must “invest[]” a certain amount of “capital” in a “commercial enterprise” to “benefit the United States economy and create full-time employment for not fewer than [ten] United States citizens or aliens lawfully admitted . . . .” 8 U.S.C. § 1153(b)(5)(A). An alien investor must generally invest $1, 000, 000 of “capital” into a new commercial enterprise, but in economically depressed areas, or “targeted employment areas, ” the required amount of capital may be reduced to $500, 000. Id. § 1153(b)(5)(C); 8 C.F.R. §204.6(f)(regulating the “required amounts of capital”).

         In 1991, the Immigration and Naturalization Service (“INS”)-USCIS' predecessor agency-promulgated regulations to implement the EB-5 Program. See 8 C.F.R. § 204.6 (1991). Among other things, the regulations set forth the criteria necessary to qualify for an EB-5 visa preference. See Id. To apply, an alien investor must first submit a Form I-526 immigration petition (“petition” or “I-526 petition”). Id. § 204.6(a). The petition must be “accompanied by evidence that the alien has invested or is actively in the process of investing lawfully obtained capital in a new commercial enterprise in the United States which will create full-time positions for not fewer than [ten] qualifying employees.” Id. § 204.6(j). If the alien investor's I-526 petition is approved, he or she may apply for a visa, which would allow the alien and his or her spouse and children to be admitted to the United States on a conditional basis. See 8 U.S.C. § 1202(a); 8 U.S.C. § 1186b(a)(1). If the alien investor fulfills the EB-5 visa requirements within two years, he or she may petition for permanent residence. Id. § 1186b(c)(1), (d)(2)(A). The burden of proof to establish eligibility rests with the alien investor. See 8 U.S.C. § 1361.

         To further delineate the general eligibility criteria, the EB-5 regulations define certain key terms that are otherwise undefined in the INA. 8 C.F.R. § 204.6(e). For example, to “invest” in the new commercial enterprise and create employment, the alien investor must “contribute [a qualifying amount of] capital” to that enterprise. Id. “Capital” is defined as “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise . . . are not used to secure any of the indebtedness.” Id. To qualify as “capital, ” the invested asset must have been lawfully-obtained: “assets acquired, directly or indirectly, by unlawful means . . . shall not be considered capital.” Id. The regulations further clarify that a “contribution of capital in exchange for a note . . . obligation, or any other debt arrangement between the alien entrepreneur and the new commercial enterprise does not constitute a contribution of capital.” Id.

         At issue in this case is whether loan proceeds invested as cash constitute “cash, ” as plaintiffs claim, or “indebtedness, ” as USCIS claims. On April 22, 2015, USCIS' Immigrant Investor Program Office (“IPO”) released remarks stating that invested loan proceeds “may qualify as capital used for EB-5 investments, provided that the requirements placed upon indebtedness by 8 C.F.R. § 204.6(e) are satisfied.” See USCIS, Immigrant Investor Program Office, EB-5 Telephonic Stakeholder Engagement: IPO Deputy Chief's Remarks (Apr. 22, 2015), available at https://www.uscis.gov/sites/default/files/USCIS/Outreach/PED_IPO_Deputy_Chief_Julia_Harrisons_Remarks.pdf (hereinafter referred to as “2015 IPO Remarks”)(emphasis in original). The remarks specifically mandated:

When using loan proceeds as EB-5 capital, a petitioner must demonstrate first that they are personally and primarily liable for the indebtedness. That is, they must demonstrate that they bear primary responsibility under the loan documents for repaying the debt that is being used to satisfy the petitioner's minimum required investment amount.
In addition, the petitioner must demonstrate that the indebtedness is secured by assets the petitioner owns and that the value of such collateral is sufficient to secure the amount of indebtedness that is being used to satisfy the petitioner's minimum required investment amount.

Id. at 1. Plaintiffs argue that the 2015 IPO Remarks “announced a change in [USCIS'] longstanding adjudicatory practice concerning the classification of loan proceeds.” Pls.' Mot. for Summ. J. (“MSJ”), ECF No. 19 at 21.[1] In so doing, USCIS “fundamentally reworked the definition of ‘capital'” under 8 C.F.R. § 204.6(e). Id. at 22. As such, plaintiffs challenge USCIS' interpretation of the regulation and argue that cash obtained from third-party loans and invested in an enterprise qualifies as “cash” within the regulatory definition of “capital” rather than “indebtedness.” See generally Pls.' MSJ, ECF No. 19.

         B. Plaintiffs' I-526 Petitions

         The individually-named plaintiffs are two alien investors who challenge USCIS' decision to deny their petitions on behalf of a putative class of alien investors. Compl., ECF No. 1 ¶ 1; see Pls.' Mot. for Class Certification (“Pls.' Class Cert. Mot.”), ECF No. 10. As certified below, the plaintiffs represent all Form I-526 petitioners who: (1) invested cash in a new commercial enterprise in an amount sufficient to qualify as an EB-5 investor; (2) obtained some or all of the cash invested in the new commercial enterprise through a loan; (3) filed an I-526 petition based on that investment;[2] and (4) received or will receive a denial of their I-526 petition solely on the ground that the loan used to obtain the invested cash fails the collateralization test described in the USCIS 2015 IPO Remarks announcement.

         Named plaintiff Huashan Zhang is a citizen of the People's Republic of China seeking to immigrate to the United States with his wife and children. Zhang Admin. R. (“Zhang A.R.”), ECF Nos. 27-2, 27-3, 27-4. On December 23, 2013, Mr. Zhang filed an I-526 petition claiming that he fulfilled the minimum capital requirement by investing $500, 000 in cash in a new commercial enterprise in Las Vegas, Nevada. Zhang A.R., ECF No. 27-2 at 4-26. Mr. Zhang obtained the invested $500, 000 via a loan from Shaanxi Northwest Textile and Dyeing Company (“Shaanxi Northwest”). Id. at 22. Mr. Zhang owns 99 percent of Shaanxi Northwest. Id. The loan was secured by his undistributed profits held by the company, which greatly exceeded $500, 000. Id. at 22-25; Zhang A.R., ECF No. 27-3 at 4 (loan agreement between Shaanxi Northwest and Mr. Zhang). Shaanxi Northwest wired the loan proceeds to Mr. Zhang's personal account. Zhang A.R., ECF No. 27-2 at 20, 25-26. Mr. Zhang then converted the loan proceeds into U.S. currency and wired the funds into an escrow account earmarked for the new commercial enterprise. Id.

         On May 28, 2015, USCIS denied Mr. Zhang's I-526 petition, asserting that Mr. Zhang did not place the required amount of capital at risk for the purpose of generating a return on his investment. Zhang A.R., ECF No. 27-4 at 175-85. Interpreting the invested cash loan proceeds as “indebtedness, ” USCIS determined that Mr. Zhang's investment did not qualify as “capital” because the Shaanxi Northwest loan was not secured by his personal assets. Id. at 179-80. Instead, Mr. Zhang's loan was secured solely by his undistributed profits, which belonged to Shaanxi Northwest until distributed. Id. Because Mr. Zhang had not met the requirements for “indebtedness, ” USCIS concluded that he “had not placed the required amount of capital at risk for the purposes of generating a return on his investment as the shareholder loan proceeds do not constitute qualifying capital pursuant to 8 C.F.R. § 204.6(e).” Id. at 180 (emphasis added).

         Second named plaintiff Mayasuki Hagiwara is a Japanese citizen seeking to immigrate to the United States with his wife though the EB-5 Program. Hagiwara Admin. R. (“Hagiwara A.R.”), ECF No. 27-1. On March 17, 2014, Mr. Hagiwara filed his I-526 petition with USCIS, asserting eligibility based on his $500, 000 cash investment in a new commercial enterprise in Tonopah, Nevada. Id. at 4-14. Mr. Hagiwara obtained the invested $500, 000 via a personal loan from J. Kodama, Inc., a Hawaiian corporation of which Mr. Hagiwara is a majority shareholder. Id. at 10. The loan was secured by Mr. Hagiwara's stock holdings in the corporation. Id. at 254. The funds were wired and “released” to the new commercial enterprise “for deployment” in accordance with its business plan. Id. at 11.

         Employing the same general reasoning as in Mr. Zhang's case, USCIS denied Mr. Hagiwara's I-526 petition on March 27, 2015. Id. at 392-95. USCIS found that Mr. Hagiwara's investment did not qualify as “capital” pursuant to 8 C.F.R. § 204.6(e) because he invested cash loan proceeds that were not secured by personal assets. Id. at 394-95. Although Mr. Hagiwara protested that he had invested “cash” and not “indebtedness, ” USCIS reasoned that investing loan proceeds is tantamount to investing indebtedness, which must be secured by the petitioner's personal assets under the regulation. Id. at 395. USCIS concluded that the regulation “clearly precluded” characterizing “all unsecured third-party loans” as contributions of cash and denied his petition. Id.

         C. Procedural History

         Plaintiffs filed their complaint on June 23, 2015 and all pending motions were ripe for review by June 2016. However, the Court stayed the case in March 2017 when the parties indicated that they were amenable to settlement assistance from the Court's mediation program. Mediation efforts failed, and the pending motions are ready for adjudication.

         III. Analysis

         Pending before the Court are: (1) plaintiffs' motion for summary judgment; (2) USCIS' cross-motion for summary judgment; (3) plaintiffs' motion to certify class; and (4) plaintiffs' motion to amend the complaint. The Court first considers the cross-motions for summary judgment. The Court analyzes two of plaintiffs' four claims: (1) that USCIS' interpretation of 8 C.F.R. § 204.6, the EB-5 regulation, is erroneous because it contravenes the regulation's plain meaning; and (2) that USCIS violated the APA because its interpretation is a legislative rule promulgated without notice and comment. Because the Court agrees with plaintiffs on these two claims, it need not assess plaintiffs' two other claims: (1) that USCIS' application of its interpretation has been impermissibly applied retroactively;[3] and (2) that USCIS' interpretation is ultra vires and exceeds its statutory authority conferred by the INA. The Court then considers plaintiffs' motion to certify class. Because the Court grants in part plaintiffs' motion for summary judgment and motion to certify class, it need not consider the pending motion to amend the complaint.

         A. Cross-Motions for Summary Judgment

         Though each of plaintiffs' four claims against USCIS is disputed, the essential issue is whether lawfully-obtained, loan proceeds invested in the enterprise as cash are properly characterized as “cash” or as “indebtedness” pursuant to 8 C.F.R. § 204.6(e). Because the Court agrees that USCIS' interpretation of its regulation is plainly erroneous, denying plaintiffs' petitions pursuant to that interpretation was arbitrary and capricious. Moreover, the Court finds that USCIS' interpretation effectively amends a regulation without notice and comment, violating the APA.

         1. USCIS' Interpretation of 8 C.F.R. § 204.6(e) is Plainly Erroneous

         a. The Parties' Arguments

         Plaintiffs argue that USCIS' interpretation[4]-that third-party loan proceeds invested as cash in a commercial enterprise are properly characterized as “indebtedness” within the meaning of “capital”-is plainly erroneous. Plaintiffs contend that USCIS' interpretation, as articulated in the 2015 IPO Remarks, “ignores the plain language, structure, history, and purpose of the regulation on which it purports to be based.” Pls.' MSJ, ECF No. 19 at 30. They argue that the plain meaning of the word “cash” encompasses cash loan proceeds and the definition of “capital” in the regulation mandates that lawfully-obtained “cash” necessarily qualifies as “capital” without further collateral prerequisites. Id. at 31-33 (“[C]ash obtained from a loan is no less ‘cash' than cash obtained from any other source.”). Because plaintiffs invested the requisite amount of lawfully-obtained cash, they argue that they satisfactorily invested “capital.” Id. at 30-35.

         Plaintiffs also argue that cash loan proceeds cannot be characterized as “indebtedness, ” the only form of “capital” that must be secured by assets owned by the alien investor. Id. at 33-34. Because indebtedness means the “condition of being indebted, ” plaintiffs contend that investing indebtedness is only “an asset of value to the new commercial enterprise” when “it describes an investor's obligation to make monetary payments to the enterprise at a later date.” Id. at 33 (emphasis added). Thus, “indebtedness” is not a debt to an unrelated third-party lender, but rather a debt to the enterprise itself. Id. at 33-35. Plaintiffs also argue that USCIS' interpretation is inconsistent with the history and structure of the regulation and the INA. See Id. at 36-37. Finally, plaintiffs argue that USCIS did not provide a rational explanation for its interpretation and that USCIS ignored the unfair effect of applying its interpretation retroactively to plaintiffs' cases.[5]Id. at 37-38.

         USCIS responds that its decision to deny plaintiffs' petitions was “reasonable.” Defs.' MSJ & Opp'n, ECF No. 22 at 13. According to USCIS, its decisions were based on its “longstanding interpretation of its regulation” that cash loan proceeds invested in an enterprise are properly characterized as “indebtedness, ” and thus must be personally collateralized to qualify as “capital.” Id. at 24. Therefore, to qualify, a petition must establish that the alien investor “secured the loan using assets for which they own and are personally and primarily liable.” Id.

         USCIS also argues that its interpretation is not erroneous because it “aligns with the foundational requirements that the alien investor must demonstrate that he is placing capital he owns directly at risk.” Id. at 25 (citing 8 C.F.R. § 204.6(j)(2), (3)). According to USCIS, an alien investor must provide different evidence to show that his or her investment is “at risk” depending on the source of that investment. See Id. at 26. Because plaintiffs obtained their capital from loan proceeds, USCIS argues that they must provide evidence of “any loan . . . agreement . . . which is secured by assets of the petitioner” to show that the investment is at risk. Id. (quoting 8 C.F.R. § 204.6(j)(2)(v)). USCIS further contends that if it simply reduced all financial arrangements to “their tangible end product - ‘cash, '” as plaintiffs argue, the agency would be unable to investigate an investor's ownership and source of funds. Id. at 27.

         Finally, USCIS argues that because the agency is interpreting its own regulation, it is entitled to “even greater deference than the Chevron standard, ” which plaintiffs have failed to overcome. Id. at 24 (quoting Consarc Corp. v. U.S. Treas. Dep't, 71 F.3d 909, 915 (D.C. Cir. 1995)).

         b. Standard of Review

         “Summary judgment is the proper mechanism for deciding, as a matter of law, whether an agency action is supported by the administrative record and consistent with the APA standard of review, ” which “requires a reviewing court to ‘hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.'” UPMC v. Sebelius, 793 F.Supp.2d 62, 67 (D.D.C. 2011)(quoting 5 U.S.C. § 706(2)(A)). However, due to the limited role of a court in reviewing the administrative record, the typical summary judgment standards set forth in Federal Rule of Civil Procedure 56(c) are not applicable. Stuttering Found. Of Am. V. Springer, 498 F.Supp.2d 203, 207 (D.D.C. 2007) (internal citation omitted). Rather, “[u]nder the APA, it is the role of the agency to resolve factual issues to arrive at a decision that is supported by the administrative record, whereas ‘the function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.'” Id. (quoting Occidental Eng'g Co. v. INS, 7523 F.2d 766, 769-70 (9th Cir. 1985)). A reviewing court will “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” Ludlow v. Mabus, 793 F.Supp.2d 352, 354 (D.D.C. 2001) (quoting 5 U.S.C. § 706(2)(A)); see also Tenet Healthsystems Healthcorp. v. Thompson, 254 F.3d 238, 243 (D.C. Cir. 2001).

         The arbitrary and capricious standard of review is “narrow, ” and “a court is not to substitute its judgment for that of the agency.” F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 513-14 (2009)(citations and quotations omitted). An agency rule will be found to be arbitrary and capricious “if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

         A reviewing court “must give substantial deference to an agency's interpretation of its own regulations.” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)(citations omitted). However, such deference “is warranted only when the language of the regulation is ambiguous.” Christensen v. Harris County, 529 U.S. 576, 588 (2000)(emphasis added). If the regulation is ambiguous, the agency's interpretation must be given “controlling weight unless it is plainly erroneous or inconsistent with the regulation.” Thomas Jefferson Univ., 512 U.S. at 512 (citations and quotations omitted). However, if an “‘alternative reading is compelled by the regulation's plain language or by other indications of the Secretary's intent at the time of the regulation's promulgation, '” the Court need not defer to the agency's interpretation. Id. (quoting Gardebring v. Jenkins, 485 U.S. 415, 430 (1988)).

         c. USCIS' Interpretation is Plainly Erroneous

         The Court first considers whether USCIS' interpretation- that loan proceeds invested as cash are properly characterized as indebtedness-is inconsistent with the plain meaning of the regulation. If the regulation is clear that cash loan proceeds are invested as “cash, ” USCIS' interpretation of 8 C.F.R. § 204.6(e), as set forth in the 2015 IPO Remarks, is “plainly erroneous or inconsistent with the regulation” itself. Auer v. Robbins, 519 U.S. 452, 461 (1997). As such, USCIS' decisions to deny plaintiffs' petitions based solely on that interpretation would also be erroneous. See id.; see also 2015 IPO Remarks at 1; See Zhang A.R., ECF No. 27-4 at 179-80 (“[P]etitioner has not demonstrated that he has placed the required amount of capital at risk . . . as the shareholder loan proceeds do not constitute qualifying capital pursuant to 8 C.F.R. § 204.6(e).”); Hagiwara A.R., ECF No. 27-1 at 394-96 (“Petitioner has failed to establish by a preponderance of the evidence that his unsecured loan . . . meets the regulatory definition of capital.”).

         As discussed below, the Court first finds that the regulation is unambiguous and USCIS' interpretation contravenes its plain meaning. The Court also concludes that USCIS' interpretation is inconsistent with its own precedent and the context and history of the EB-5 Program. As such, the Court concludes that USCIS' decisions to deny plaintiffs' petitions were arbitrary and capricious.

         i. The EB-5 Regulation is Unambiguous

         The INA mandates that visas must be made available when an alien “has invested . . . capital” in a specified amount to “benefit the United States economy and create full-time employment for not fewer than [ten] United States citizens . . . .” 8 U.S.C. § 1153(b)(5). Congress did not define “invest” or “capital” in the statute. See Id. In 1991, USCIS' predecessor agency, the INS, published regulations defining both:

Invest means to contribute capital.[6]
Capital means cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness. All capital shall be valued at fair market value in United States dollars. Assets acquired, directly or indirectly, by unlawful means (such as criminal activities) shall not be considered capital for the purposes of section 203(b)(5) of the Act.

8 C.F.R. § 204.6(e)(emphasis added and alphabetical order reversed).

         “Capital” is therefore the type of asset that is invested or “contributed” to the commercial enterprise for the purpose of creating employment. See id.; 8 U.S.C. § 1153(b)(5). To be considered “capital, ” an invested asset must meet only two requirements: (1) it must be contributed in one of the six acceptable forms; and (2) it must be lawfully acquired. See 8 C.F.R. § 204.6(e). The definition approves six forms of “capital”: “[1] cash, [2] equipment, [3] inventory, [4] other tangible property, [5] cash equivalents, and [6] indebtedness [so long as the invested indebtedness is secured by assets owned by the investor, such that the investor is personally and primarily liable, and that the enterprise is not used to secure the debt].” Id.

         The regulation does not define “cash” or “indebtedness” within the definition of “capital.” However, the text plainly directs the agency to view the transaction between the alien investor and the enterprise to identify the particular asset actually “contributed” to the enterprise. Id. (“invest means to contribute capital”); 8 U.S.C. § 1153(b)(5)(visas shall be made available to aliens who invest capital in an enterprise to benefit the economy and create employment). USCIS must therefore determine whether that contributed asset meets the definition of “capital, ” i.e., whether it was: (1) contributed in an acceptable form; and (2) lawfully acquired. See Id. In plaintiffs' cases, it is undisputed that the assets actually contributed to the enterprises were cash loan proceeds. See Hagiwara A.R., ECF No. 27-1 at 394-95; Zhang A.R., ECF No. 27-4 at ...


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