Three decades ago, Congress established the EB-5 Visa Program (EB-5) in order to stimulate the economy and create jobs through foreign investment in the United States. EB-5 has been another route for foreign nationals to obtain U.S. permanent residency by making a "capital" investment in the amounts at least $1,000,000, except $500,000 in certain regions with higher unemployment rates, into a "commercial enterprise" to create at least ten full time jobs in the United States.
Although prior administrations chose to renew EB-5 without change every time the program was set to expire, this June the Trump Administration issued a notice requesting that Congress either eliminate EB-5 or transform it. While it is unclear what changes, if any, will ultimately be made to EB-5, two of the biggest proposed changes are (1) the increase in the minimal investment amount from $500,000 to $800,000 and (2) limitations of the definition of a Targeted Employment Area (TEA). These changes, however, were not implemented by this year's EB-5 expiration deadline, December 7, 2018. Instead, the program was extended to December 21, 2018, without change once again.
While practitioners continue to expect changes to EB-5, two weeks ago the U.S. District Court for the District of Columbia issued a decision in Zhang, et al. v. United States Citizenship and Immigration Services, et al., No. 15-cv-995 (D.C. Nov. 30, 2018)น (Zhang) that is of interest to EB-5 investors. It should not, however, be interpreted as a windfall for those seeking to use borrowed funds to finance an EB-5 investment.
The plaintiffs in Zhang challenged the denial of their EB-5 petitions by the United States Citizenship and Immigration Services (USCIS), claiming that USCIS's interpretation of its own regulation was "arbitrary and capricious" in violation of the Administrative Procedure Act (APA), 5 U.S.C. ง 706, and the Immigration and Nationality Act (INA), 8 U.S.C. ง 1153(b)(5). Furthermore, plaintiffs claimed that USCIS engaged in improper rulemaking in violation of APA when it added another requirement to the definition of "capital" for EB-5 purposes without notice and comment procedure. Finally, plaintiffs also asserted that USCIS exceeded its statutory authority under the INA by impermissibly applying its interpretation of the regulations retroactively to deny plaintiffs' petitions. Plaintiffs also moved for a class action certification.
The court in Zhang found that (1) USCIS's interpretation of the term "capital" was erroneous because it went beyond the structure and plain language of regulation 8 C.F.R. ง204.6(f) (regulating the "required amounts of capital") and the history of EB-5; and (2) USCIS violated the APA as it did not comply with the notice and comment requirement by retroactively adopting its interpretation of the rules rather than explicitly amending the regulation. The court granted the plaintiffs' motion for certification of the class with certain modifications, limiting the class members to be the petitioners whose petitions were denied solely based on USCIS's flawed interpretation of its regulation as described in USCIS's Immigrant Program Office Remarks, released on April 22, 2015 (2015 IPO Remarks). We discuss the specifics of the court's reasoning in greater detail below.
The essential issue in Zhang was whether lawfully obtained loan proceeds invested in the enterprise constitute "cash" as the plaintiffs argued or "indebtedness," which is required to be collateralized within the meaning of "capital," as the USCIS claimed. The 2015 IPO Remarks state 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. ง204.6 (e) are satisfied." In addition to the requirement that the "capital" must be lawfully attained, 8 C.F.R. ง204.6 (e) defines the term "capital" 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 upon which the petition is based are not used to secure any of the indebtedness."
The 2015 IPO Remarks stated that if EB-5 investors use loan proceeds as EB-5 capital, then such EB-5 investors must demonstrate that they are personally and primarily liable for the indebtedness and that the indebtedness is secured by assets petitioners own sufficient to secure the amount of the debt. In other words, USCIS treated cash capital obtained from loan proceeds contributed to the new commercial enterprise as a contribution of "indebtedness" that must be personally collateralized, rather than an actual cash contribution.
The two named plaintiffs in Zhang were EB-5 investors whose petitions were denied because their EB-5 investment amounts were sourced from uncollateralized loans. Co-plaintiff Zhang obtained the investment amount via a loan from a company of which he was the 99 percent owner; the loan was secured by his undistributed profits. USCIS denied Zhang's petition because the loan was not secured by his own personal assets, concluding that Zhang's investment did not qualify as "capital." Similarly, co-plaintiff Hagiwara obtained the investment amount via a personal loan from a corporation in which he was a majority shareholder. His petition also was denied because he had invested "indebtedness" and not "cash," as investing loan proceeds is equivalent to investment indebtedness, which must be secured by personal assets.
The court held USCIS's interpretation that loan proceeds invested as cash constitutes indebtedness to be erroneous because it is (1) not consistent with the "ordinary and natural meaning" of "cash" and (2) "capricious and arbitrary" as it is at odds with the congressional intent behind EB-5.
First, the court considered the ordinary meaning of cash by examining Black's Law Dictionary's definition, since the statute does not define "cash." Black's defines "cash" to be "money or its equivalent" such as "currency or coins." The court therefore found that the plaintiffs' lawfully acquired cash unambiguously qualifies as "capital" under 8 C.F.R. ง204.6 (e). The court concluded that when USCIS interpreted the plaintiffs' investment from loan proceeds as "indebtedness," USCIS impermissibly created "de facto another regulation" by adding another requirement for the lawfully acquired cash not derived from a third-party loan. In addition, the court pointed out that it certainly is not "indebtedness" as plaintiffs are not contributing "debt" to the enterprises, but rather contributing cash, ready to be deployed as needed.
Second, the court found that the regulatory and statutory context and the history of EB-5 supported its conclusion. EB-5 was intended to "create new employment for U.S. workers and to infuse new capital into the country." Following the enactment of the statue, the Immigration and Naturalization Service (INS) originally proposed a definition of capital that did not include indebtedness. USCIS explained that it intended to expand the definition of capital because "Congress intended the definition [of capital] to be broad." The court found that USCIS's interpretation that narrowed the definition of capital was inconsistent with what Congress had intended.
The APA requires federal agencies to publish a "general notice of proposed rulemaking" in the Federal Register and "give interested persons an opportunity to participate in rulemaking through submission of written data, views, or arguments"ฒ unless it is interpretive or a statement of policy. If an agency does not follow proper rulemaking procedures, a court can "hold unlawful and set aside agency action, findings, and conclusions to be ... without observance of procedure required by law."ณ
The court found that the 2015 IPO Remarks were legislative, not interpretive, applying the following "four-part test to determine if a rule is legislative or interpretive" :
(1) [W]hether in the absence of the rule there would not be an adequate legislative basis for enforcement action or another agency action to confer benefits or ensure the performance of duties; (2) whether the agency has published the rule in the Code of Federal Regulations; (3) whether the agency has explicitly invoked its general legislative authority; and (4) whether the rule effectively amends a prior legislative rule. If the answer to any of these questions is affirmative, we have a legislative rule.5
Here, the court found that the fourth factor clearly suggests that USCIS's interpretation is a legislative rule. By requiring investors to personally collateralize loan proceeds invested as cash, USCIS added an additional requirement to the regulatory definition of "capital" not found within the original regulation. In addition, it is well established that a policy that adds a requirement not found in the relevant regulation is a substantive rule that is invalid unless promulgated after notice and comment.6
Further, in the 2015 IPO Remarks, USCIS states that adjudication "must" follow its interpretation by ensuring that the petitioner has established that he or she is personally and primarily liable for the loan when investing loan proceeds. If the petitioner is unable to demonstrate eligibility under USCIS's interpretation, an adjudicator "will" deny the petition. Such instructions by USCIS make clear that its interpretation carries the force of law as the adjudicators are not free to exercise discretion and the interpretation is binding on all parties.
Therefore, the court in Zhang concluded that USCIS violated APA's notice and comments requirement, as it created an additional requirement to the regulation that was legislative.
In addition to the two arguments summarized above, the plaintiffs in Zhang requested that the court approve their petitions outright. However, as the Supreme Court has instructed in City of Los Angeles v. Shalala, 192 F.3d 1005, 1023 (D.C. Cir. 1999) (quoting Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744, (1985)), the court found it was appropriate to remand the matter to USCIS for additional investigation or explanation when the record before the agency does not support the agency action. This is especially the case "in the field of immigration" where "there may be sensitive issues lurking that are beyond the ken of the court."
The court granted the plaintiffs' motion for class certification after it found that all four of the requirements listed in Federal Rule of Civil Procedure 23 were met, i.e., the class was readily ascertainable, sufficiently numerous, shared common questions of law, and the claims were typical to the entire class. Plaintiffs requested to certify the class of petitioners who filed a Form I-526 petition prior to April 22, 2015, the date of publication of the 2015 IPO Remarks. The court modified the plaintiffs' proposal in two ways. First, the court found that any denial based on USCIS's interpretation was erroneous, and thus any date limitation was unduly arbitrary. Second, the court amended the definition to clarify that only investors who received a denial of their I-526 petition solely based on the USCIS's interpretation of 8 C.F.R. ง204.6 (e) were included in the class. In other words, the class does not include the investors who received denials for multiple reasons.
It is unclear how this decision will play out for EB-5 and further actions by USCIS, especially given the approaching deadline for reauthorization of EB-5, scheduled at present for December 21, 2018, and a strong push for legislative changes in EB-5. It also is unlikely that USCIS will move for any formal rule-making in response to the decision in Zhang at this point. But those investors who seek to use borrowed funds or who have had EB-5 petitions denied solely on grounds of use of borrowed funds should work with an immigration counsel to address how this decision affects them.