Mirror Lake Vill., LLC v. Wolf

971 F.3d 373

MIRROR LAKE VILLAGE, LLC, et al., Appellants

v.Chad F. WOLF, Acting Secretary, U.S. Department of Homeland Security, et al., Appellees

No. 19-5025

United States Court of Appeals, District of Columbia Circuit.

Argued February 4, 2020

Decided August 21, 2020

H. Ronald Klasko argued the cause and filed the briefs for appellants.

Joshua S. Press, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief was Glenn M. Girdharry, Assistant Director.

Before: Henderson and Garland, Circuit Judges, and Williams, Senior Circuit Judge.^*

Concurring opinion filed by Circuit Judge Henderson.

Garland, Circuit Judge:

The EB-5 program allots visas to immigrants who have "invested ... capital" in a new commercial enterprise that will "benefit the United States economy" and "create full-time employment" for ten citizens or non-citizens with work authorization. 8 U.S.C. § 1153(b)(5)(A)(i)-(ii). The plaintiffs in this case are Mirror Lake Village, LLC, a new commercial enterprise set to construct and operate a senior living facility in rural Washington, and five foreign nationals who each contributed $500,000 to Mirror Lake. The foreign nationals sought to obtain lawful permanent resident status under the EB-5 immigrant-investor program. The U.S. Citizenship and Immigration Services (USCIS) denied their EB-5 visa petitions on the stated ground that none had made a qualifying investment. The plaintiffs contend that the denials were arbitrary and capricious. Because USCIS failed to offer a reasoned explanation for its denials, we agree.

I

The EB-5 program, so-named because it is the fifth employment-based visa category available to foreign nationals, is part of the Immigration and Nationality Act. See 8 U.S.C. §§ 1101 et seq. ; id. § 1153(b)(5). As quoted above, it allots visas to immigrants who have "invested ... capital" in a new commercial enterprise that "will benefit the United States economy and create full-time employment" for ten citizens or non-citizens with work authorization. Id. § 1153(b)(5)(A)(i)-(ii). At the relevant time here, an immigrant investing in an enterprise located in a rural area had to contribute at least $500,000 to qualify. Id. § 1153(b)(5)(B)(ii) ; EB-5 Immigrant Investor Program Modernization , 84 Fed. Reg. 35,750, 35,806 n.149 (July 24, 2019).

Although the statute does not define the term "invest," the Department of Homeland Security (DHS) has defined it by regulation as "to contribute capital." 8 C.F.R. § 204.6(e). According to DHS, a "note, bond, convertible debt, obligation, or any other debt arrangement ... does not constitute a contribution of capital." Id. In order to distinguish between a qualifying capital contribution and a prohibited debt arrangement, USCIS determines whether an immigrant-investor has "placed the required amount of capital at risk ." Id. § 204.6(j)(2) (emphasis added); see also 84 Fed. Reg. at 35,756 (providing that an EB-5 petition "must be supported by evidence that the foreign national's lawfully obtained capital is invested (i.e., placed at risk)").

The road to lawful permanent resident status under the EB-5 program is as follows. An immigrant first files an EB-5 visa petition. Once the petition is processed and a visa becomes available -- which may take years -- the immigrant advances to "conditional" lawful permanent resident status. 8 U.S.C. § 1186b(a). Eventually, the immigrant may file a petition to have the "conditional" basis of his or her lawful permanent resident status removed. That petition must be accompanied by evidence that the immigrant has "maintained his or her capital investment" for over two years and "created or can be expected to create within a reasonable time ten full-time jobs for qualifying employees." 8 C.F.R. § 216.6(a)(4)(iii)-(iv). The immigrant then undergoes another processing period of uncertain length. Only after the second petition is approved does an EB-5 immigrant graduate to full lawful permanent resident status.

The five foreign nationals here each contributed $500,000 to Mirror Lake Village, LLC, in exchange for membership interests in the company. Because Mirror Lake is a closely held corporate entity, the plaintiffs were warned beforehand that "[t]here [would be] no secondary market" for their membership interests and that it was "not expected that any w[ould] develop." Offering Memorandum at 4 (J.A. 22). But the Mirror Lake Operating Agreement does provide the plaintiffs with two opportunities to sell their ownership shares.

First, each plaintiff has a "one-time right and option" to sell all or part of the plaintiff's membership interest back to Mirror Lake "at the purchase price thereof" once the conditional basis of the plaintiff's lawful permanent resident status is removed. Operating Agreement at 8 (J.A. 8); see id. at 1 (J.A. 1). Second, beginning two years after that, each plaintiff can sell 20% of the plaintiff's interest to Mirror Lake each year "at a price equal to the Fair Market Value thereof," such that a full interest can be sold back to the company over five years. Id. at 9 (J.A. 9).¹

Critically for our purposes, the ability of a plaintiff to exercise either of these sell-back options is contingent on Mirror Lake having "sufficient Available Cash Flow" at the time the option is triggered. See id. at 8, 9 (J.A. 8, 9). "Available Cash Flow," according to the Operating Agreement, equals the "total cash available to the Company from all sources less the Company's total cash uses before payment of debt service." Id. at 1 (J.A. 1). The sell-back options are further subject to Mirror Lake having sufficient available cash flow "excluding capital contributed by Members." Id. at 8, 9 (J.A. 8, 9).

The plaintiffs filed identical EB-5 visa petitions with USCIS, providing evidence of their capital contributions to Mirror Lake. USCIS denied each, finding that the plaintiffs "fail[ed] to establish that [they] ha[d] placed the required minimum amount of capital at risk." Visa Denial at 5 (J.A. 65); see 8 C.F.R. § 204.6(j)(2).

The denials hinged on the presence of the sell-back options in the Mirror Lake Operating Agreement. Visa Denial at 5-6 (J.A. 65-66). In USCIS's view, the "Operating Agreement ... stated explicitly ... that [each] investor's capital will be returned upon demand at the end of the petitioner's conditional residency." Id. at 6 (J.A. 66). USCIS acknowledged that the sell-back options are "expressly contingent" on Mirror Lake's available cash flow and hence on its "future financial performance." Id. Nevertheless, the agency said, if Mirror Lake is "profitable" and has "sufficient cash flow," the plaintiffs can redeem their membership interests. Id. Therefore, it concluded, the plaintiffs’ capital "is not properly ... ‘at risk.’ " Id.

The plaintiffs filed motions requesting that USCIS reopen and reconsider the denials of their EB-5 petitions. USCIS denied those motions, too, finding that the plaintiffs had "still not demonstrated that the required minimum amount of capital was placed at risk." Denial of Mot. at 5 (J.A. 87). Again, USCIS rejected the contention that the plaintiffs faced a risk of loss because exercise of the sell-back options turned on available cash flow. "This argument neglects to contemplate [Mirror Lake's] potential success," USCIS said. Id.

Having exhausted their opportunities for recourse at USCIS, the five plaintiffs, along with Mirror Lake, filed an Administrative Procedure Act challenge in the district court. See 5 U.S.C. § 702.² Together, they argued that USCIS's denials of the plaintiffs’ EB-5 visa petitions were arbitrary and capricious or otherwise in excess of statutory authority. Disagreeing, the district court granted summary judgment to USCIS. Mirror Lake Village v. Nielson , 345 F. Supp. 3d 56, 64-68 (D.D.C. 2018).

II

We must hold unlawful agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). An agency's actions are arbitrary and capricious if they are not "reasonably explained." Jackson v. Mabus , 808 F.3d 933, 936 (D.C. Cir. 2015).

1. In this case, USCIS did not reasonably explain its denials of the plaintiffs’ visa petitions. In both its initial denials and in rejecting the plaintiffs’ motions for reconsideration, USCIS offered a clear definition of "capital at risk": "For the capital to be ‘at risk,’ " the agency said, "there must be a risk of loss and a chance for gain." Visa Denial at 4 (J.A. 64); Denial of Mot. at 4 (J.A. 86). But as the plaintiffs point out, their investments fit that description. Because the sell-back options in the Operating Agreement are contingent on Mirror Lake's available cash flow, any return on capital is "entirely subject to business fortunes." Mirror Lake Br. 3. If Mirror Lake is unsuccessful -- or even just short on cash -- the plaintiffs will be unable to recoup their investments. Only if Mirror Lake is successful will they have an opportunity for gain.

The agency's only response to this point was to say: "[T]he petitioner is arguing that her capital is at risk only insofar as the [business] is not profitable. Should the [business] be profitable and have sufficient cash flow, the [sell-back] Option was clearly written as an exit strategy." Visa Denial at 6 (J.A. 66). Elaborating on this explanation for why the capital was not "at risk," the agency's denial of rehearing stated: "[The petitioner's] argument neglects to contemplate the [business’] potential success." Denial of Mot. at 5 (J.A. 87).

This "explanation" is no explanation at all. The possibility that the business will succeed does not negate the risk of loss if it does not. If it did, even the purest stock investment would not be at risk because there is always the possibility (and the hope) that a business will succeed. In fact, as quoted above, the agency's explanation directly contradicted its own definition of "at risk," as set out earlier in each USCIS decision under...