Huashan Zhang v. U.S. Citizenship & Immigration Servs.

• Decision Date: 27 October 2020
• Docket Number: No. 19-5021,19-5021
• Citation: 978 F.3d 1314
• Parties: HUASHAN ZHANG and Masayuki Hagiwara, Appellees v. UNITED STATES CITIZENSHIP AND IMMIGRATION SERVICES, et al., Appellants
• Court: U.S. Court of Appeals — District of Columbia Circuit

978 F.3d 1314

HUASHAN ZHANG and Masayuki Hagiwara, Appellees

v.UNITED STATES CITIZENSHIP AND IMMIGRATION SERVICES, et al., Appellants

No. 19-5021

United States Court of Appeals, District of Columbia Circuit.

Argued February 21, 2020

Decided October 27, 2020

Christopher A. Bates, Counsel to the Assistant Attorney General, U.S. Department of Justice, argued the cause for appellants. With him on the briefs were Matthew J. Glover, Counsel to the Assistant Attorney General, Glenn M. Girdharry, Assistant Director, and Aaron S. Goldsmith, Senior Litigation Counsel. Joshua S. Press, Attorney, entered an appearance.

Ira Kurzban argued the cause for appellees. With him on the brief was John P. Pratt, Coral Gables, FL.

Before: Millett, Katsas, and Rao, Circuit Judges.

Katsas, Circuit Judge:

Certain visas are available to prospective immigrants who invest capital in the United States. A longstanding regulation, promulgated in 1991, defines the required capital to include cash or indebtedness secured by the immigrant's assets. This appeal presents the question whether, under the regulation, the proceeds of a loan qualify as cash or indebtedness. We hold that loan proceeds qualify as cash, and we therefore affirm a decision affording relief to a class of foreign investors denied visas under a contrary interpretation adopted and announced by the government in 2015.

I

A

In 1990, Congress amended the Immigration and Nationality Act (INA) to establish the employment-based, fifth preference immigrant visa program, commonly known as the EB-5 visa program. See Immigration Act of 1990, Pub. L. No. 101-649, § 121(a), 104 Stat. 4978, 4987–90. This program provides "employment creation" visas to prospective immigrants seeking to engage in a new commercial enterprise in the United States. 8 U.S.C. § 1153(b)(5)(A). To qualify for such a visa, an applicant must have "invested" or be "actively in the process of investing" a minimum amount of "capital" in the new enterprise, which must create full-time jobs for at least ten qualifying workers. Id. In recent years, the minimum required investment has been either $1,000,000 or, if the investment was made in a targeted area, $500,000. See id. § 1153(b)(5)(C) ; 8 C.F.R. § 204.6(f) (2019). A targeted area is a rural area or one experiencing high employment. 8 U.S.C. § 1153(b)(5)(B)(ii).

In 1991, the Immigration and Naturalization Service (INS) promulgated implementing regulations for the EB-5 visa program. From then until 2019, the regulations defined the terms "capital" and "invest" as follows:

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.

* * *

Invest means to contribute capital. A contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the alien entrepreneur and the new commercial enterprise does not constitute a contribution of capital for purposes of this part.

8 C.F.R. § 204.6(e) (2019).¹

In 1998, the INS rendered precedential decisions applying these regulatory requirements to loans and promissory notes. One decision held that a loan from the investor to the enterprise does not qualify as an investment of capital. Matter of Soffici , 22 I. & N. Dec. 158, 162–63 (Assoc. Comm. 1998). A second decision explained that a promissory note from the investor to the enterprise may constitute either indebtedness or evidence that the investor is "in the process of investing other capital, such as cash." Matter of Izummi , 22 I. & N. Dec. 169, 193 (Assoc. Comm. 1998) (cleaned up). A third decision held that such a promissory note, to qualify as capital under the indebtedness prong of the definition, must be secured by assets amenable to seizure. Matter of Hsuing , 22 I. & N. Dec. 201, 202 (Assoc. Comm. 1998).

This case presents the further question of how the regulation treats the cash proceeds of a loan. The INS's successor agency, the United States Citizenship and Immigration Services (USCIS), addressed that question on a conference call with outside parties held on April 22, 2015. During that call, a deputy chief within the Immigrant Investor Program Office (IPO) of USCIS stated that, when a foreign investor invests cash from a loan in a new U.S. enterprise, USCIS treats the investment as indebtedness rather than cash. Thus, according to the deputy chief, "[p]roceeds from a loan 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." J.A. 42. In particular, the loan must be "secured by assets" owned by the foreign investor. Id.

B

The two plaintiffs in this case were denied EB-5 visas based on this interpretation of the regulation. One denial occurred shortly before USCIS publicly announced its position, and the other shortly after.

Masayuki Hagiwara is a Japanese citizen. In 2013, Hagiwara borrowed $500,000 from a corporation that he controlled and invested the money in a new commercial enterprise in Nevada, a targeted area. In 2014, Hagiwara filed what USCIS calls Form I-526, a petition to establish his eligibility for an EB-5 visa. In March 2015, USCIS denied the petition. It reasoned that the loan proceeds invested by Hagiwara in the Nevada enterprise constituted indebtedness, not cash, under 8 C.F.R. § 204.6(e). USCIS then concluded that because the loan was not secured by Hagiwara's assets, his investment did not satisfy the regulatory requirements for indebtedness to qualify as capital.

The case of Huashan Zhang, a Chinese citizen, is similar. In 2013, Zhang borrowed $500,000 from a corporation that he controlled, invested the money in a new commercial enterprise in Nevada, and filed a Form I-526 petition. In May 2015, USCIS denied Zhang's petition on the same ground: the loan proceeds constituted indebtedness, which failed to qualify as capital because Zhang's assets did not secure the loan.

C

On June 23, 2015, Zhang and Hagiwara sued to challenge what they described as "USCIS's new collateralization rule." J.A. 20. The complaint raised four counts. First, the denial of the plaintiffs’ petitions rested on an impermissible interpretation of the governing regulation. Second, USCIS impermissibly applied its new interpretation retroactively to applicants who made investments and filed Form I-526 petitions under the law as it existed before the April 22, 2015 announcement. Third, the denial of the plaintiffs’ petitions violated the INA. Fourth, the position announced on April 22, 2015 was a legislative rule promulgated without notice-and-comment rulemaking.

Zhang and Hagiwara sought to represent a class of EB-5 investors who made investments and filed visa applications before the 2015 conference call. Specifically, they sought to represent a class defined as

[a]ll 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 a Form I-526 petition prior to April 22, 2015 based on that investment; and (4) received or will receive a denial of their I-526 petition on the ground that the loan used to obtain the invested cash fails the collateralization test described in the announcement made by USCIS during its April 22, 2015 EB-5 stakeholder engagement.

J.A. 31. On behalf of the class, the plaintiffs sought to require USCIS to reopen applications that it had denied based on the collateralization rule, and to prohibit the agency from applying the rule to pending applications.

The plaintiffs moved for class certification, and the parties then filed cross-motions for summary judgment. The district court simultaneously resolved all these motions. Zhang v. USCIS , 344 F. Supp. 3d 32 (D.D.C. 2018).

As for summary judgment, the court held that the agency's interpretation of 8 C.F.R. § 204.6(e), as articulated in the 2015 conference call, was plainly erroneous and was a legislative rule improperly promulgated without notice-and-comment procedures. 344 F. Supp. 3d at 44– 59. Having concluded that the agency's interpretation violated the regulation, the court did not reach the question whether it also violated the statute. Id. at 43. And having concluded that the 2015 interpretation could not be applied at all, the court did not reach the question whether its retroactive application was independently objectionable. Id.

The district court then certified a class under Federal Rule of Civil Procedure 23(b)(2). The court held that the class was ascertainable, that the claims of all class members arose from the same course of conduct by USCIS, and that the relief sought by the class was indivisible. 344 F. Supp. 3d at 61–65. On its own motion, the court modified the proposed class definition in two respects. First, it eliminated the requirement that class members have filed their Form I-526 petitions before the 2015 conference call—a restriction that it thought made sense only as to the unreached retroactivity claim. See id. at 65– 66. Second, the court required that each class member have filed a petition that was denied "solely" based on the agency's new position. Id. at 66. As a result of these changes, the certified class includes

[a]ll 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 a Form I-526 petition based on that investment; 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

...