Mirror Lake Village, LLC v. Chad F. Wolf

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 4, 2020 Decided August 21, 2020

No. 19-5025

MIRROR LAKE VILLAGE, LLC, ET AL.,

APPELLANTS

v.

CHAD F. WOLF, ACTING SECRETARY , U.S. DEPARTMENT OF

HOMELAND SECURITY, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 1:16-cv-01955)

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.

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Before: HENDERSON and GARLAND, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.*

Opinion for the Court filed by Circuit Judge GARLAND.

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.

*

The late Senior Circuit Judge Stephen F. Williams was a

member of the panel at the time the case was argued and participated

in its consideration before his death on August 7, 2020. Because he

died before this opinion’s issuance, his vote was not counted. See

Yovino v. Rizo, 139 S. Ct. 706, 710 (2019). Judges Henderson and

Garland have acted as a quorum with respect to this opinion and

judgment. See 28 U.S.C. § 46(d).

.

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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.

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§ 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

1

The Operating Agreement defines “Fair Market Value”

with respect to a membership interest as “the price a

knowledgeable, willing, and unpressured buyer would probably

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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.

pay to a knowledgeable, willing, and unpressured seller in the

market . . . as determined by an independent third-party

valuation service or as otherwise agreed by relevant parties.”

Operating Agreement at 2 (J.A. 2).

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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. Nielsen, 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).

2

In the district court, the plaintiffs were joined by a sixth

EB-5 visa petitioner, Zhichun Li, who had not exhausted

administrative procedures before USCIS. The district court

dismissed Zhichun Li’s complaint. Mirror Lake Village, LLC v.

Nielsen, No. 16-cv-01955 (D.D.C. Feb. 6, 2019).

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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 review.

In each, the agency explained that “for capital to be at risk 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). Here, there is a risk of

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loss if there is insufficient cash flow, and a chance for gain (the

option is, after all, optional) if the business prospers.

On appeal, the government does not even attempt to rescue

this explanation of why the petitioner’s capital is not at risk.

Indeed, its appellate brief does not even mention the cash-flow

contingency to the sell-back options. Hence, it offers no

explanation of why that contingency failed to put the plaintiffs’

investments “at risk,” as required by the regulation. See 8

C.F.R. § 204.6(j)(2).

2. Instead, USCIS turns for support to an agency precedent.

But that precedent likewise provides no support for the visa

denials.

USCIS focuses its briefing and argument on Matter of

Izummi, 22 I. & N. Dec. 169 (Assoc. Comm. 1998), which the

agency cited in its denials, and which also involved a rejected

EB-5 visa petitioner. There, the petitioner also had the

opportunity to sell his membership interest back to the business

in which he had invested. Yet, unlike in this case, there was no

contingency in Izummi. Instead, the petitioner’s capital was

“guaranteed to be returned, regardless of the success or failure

of the business.” Id. at 184. For that reason, the agency said,

the capital “cannot be considered to have been properly

‘invested’ and is not at risk.” Id. at 188.

USCIS’s visa denial cites to isolated sentences in Izummi

that it reads to mean that any “redemption agreement”

constitutes a prohibited “debt arrangement.” Visa Denial at 6

(J.A. 66). But in context, it is plain that what Izummi meant by

“redemption agreement” was the kind of agreement at issue in

that case: one that guaranteed a return of capital, without risk.

See Izummi, 22 I. & N. Dec. at 185 (finding that the redemption

agreement there was no more than a “straight loan” because the

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petitioner had made his money “available to [the business] with

the contractual expectation that it would be returned to him six

months later”). Indeed, the business in Izummi was required to

“deposit sufficient [cash] reserves for the purpose of enabling

[it] to meet its obligations under the sell-option agreement.” Id.

at 191 (internal quotation marks omitted).

In denying the plaintiffs’ motion to reopen or reconsider

here, USCIS also cited Izummi for the proposition that a sell-

back option contingent on business success constitutes an

“illusory promise[]” that the agency will not accept. Denial of

Mot. at 5 (J.A. 87) (internal quotation marks omitted). On

appeal, USCIS does not attempt to defend that argument either,

and for good reason: it is a misreading of Izummi. Izummi

discussed “illusory promises” in the context of responding to an

attorney’s claim that the investment there was at risk, not

because its redemption was dependent on business success, but

because the business might simply refuse to repay the petitioner

as the contract required. “While most normal investors . . .

realize that they risk losses due to business downturns,” Izummi

explained, “the[] attorney believes that their risk instead

involves the refusal of the[] [business] to comply with the

written contract.” Izummi, 22 I. & N. at 185.

Izummi refused to accept the risk of an “illusory promise”

-- i.e., a sell-back agreement that a business simply refused to

honor -- as “the kind of risk contemplated by 8 C.F.R.

§ 204.6(j)(2).” Id. The investment risk at issue here is not of

that illusory type. It is the risk of loss if a business does not

succeed, not the risk that the business will simply renege on its

contract.

In sum, the plaintiffs put their capital at risk because the

redemption of their investments is dependent on the success of

the business. USCIS’s decision to deny the visas on the

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purported ground that the investments are not at risk at all is

neither reasonably explained nor supported by agency precedent.

It is therefore arbitrary and capricious and must be set aside.

Fogo De Chao (Holdings) Inc. v. DHS, 769 F.3d 1127, 1141

(D.C. Cir. 2014).

III

For the foregoing reasons, we reverse the judgment of the

district court and remand with instructions to set aside the

denials of the plaintiffs’ EB-5 petitions.

So ordered.

KAREN LECRAFT HENDERSON, Circuit Judge, concurring:

Although I join the court’s opinion, I write separately to urge

caution. The EB-5 program is well known for its susceptibility

to fraud and abuse. See, e.g., Audrey Singer and Camille

Galdes, Improving the EB-5 Investor Visa Program:

International Financing for U.S. Regional Economic

Development, Brookings-Rockefeller Project on State and

Metropolitan Innovation, 3, 11 (Feb. 2014),

https://www.brookings.edu/wp-content/uploads/2016/06/EB5

_Report.pdf (noting the EB-5 program’s “negative reputation,”

that it “faced widespread fraud and abuse in its first few years

of operation” and “[m]ore recently, several high-profile cases

have brought unfavorable attention to the program”). Given

this vulnerability, I believe we should hesitate to undo USCIS’s

efforts designed to ensure the integrity and further the purpose

of the program—i.e., to “benefit the United States economy

and create full-time employment.” 8 U.S.C.

§ 1153(b)(5)(A)(ii). This includes its effort to ensure that the

funds invested in domestic businesses in exchange for

permanent residency remain there.

I agree that the USCIS failed to explain adequately its

denial of the plaintiffs’ visa petitions but I believe the question

whether the investment was sufficiently “at risk,” see 8 C.F.R.

§ 204.6(j)(2), is close. If the only risk an investor must show

is that the business may not succeed or not be profitable

enough, that interpretation could undermine the purpose of the

program. The line between a business failing and a business

not being as successful or profitable as investors anticipated is

thin. Indeed, that risk is faced by any business investor. See

Matter of Izummi, 22 I. & N. Dec. 169, 185 (Assoc. Comm.

1998) (“The risk that the petitioner might not receive payment

if the Partnership fails is no different from the risk any business

creditor incurs.”). But the EB-5’s goal of “benefit [to] the

United States economy,” § 1153(b)(5)(A)(ii), contemplates

that the required investment in the business remain there,

including after a visa is obtained. Granted, the plaintiffs here

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can exercise their put option only if Mirror Lake is profitable

enough that it has sufficient cash flow without regard to the

investment made pursuant to the EB-5 program. Operating

Agreement at 8 (J.A. 8) (put option “subject to the Company

having sufficient Available Cash Flow (excluding capital

contributed by Members)”). Nevertheless, to ensure that a

sufficient risk exists that does not simultaneously defeat the

purpose of the EB-5 program, the risk threshold—i.e., the

requisite success of the business—should plainly be something

more demanding than simply not going bankrupt.