Could Maryland constitutionally bar the state treasury from depositing funds in banks that lent money to apartheid-era South Africa?

Plain-English summary

Governor Harry Hughes asked the Attorney General to review House Bill 1267, which would have barred the State Treasurer from depositing Maryland funds in any financial institution unless it certified that it had no direct loans, or knowing involvement in indirect loans, to the government of the Republic of South Africa or South African national corporations, with an exception for loans made by foreign or out-of-state affiliates without the depositary institution's participation. The opinion analyzed three possible constitutional problems: a Commerce Clause challenge, a Supremacy Clause conflict with federal treaties or export law, and an intrusion on the federal government's exclusive foreign affairs power. On the Commerce Clause, the opinion concluded that Maryland was acting as a market participant, choosing where to place its own money, rather than as a regulator of private commerce, so the usual Commerce Clause limits did not apply. On preemption, the opinion found no conflict with treaties in force with South Africa or with the Export Administration Act, since state investment decisions were not "exports" and the bill was not tied to a foreign country's boycott. On foreign affairs, the opinion distinguished the bill from an Oregon inheritance statute the Supreme Court had struck down for requiring courts to scrutinize foreign governments' conduct, reasoning that House Bill 1267's effect was prospective, limited to certain financial institutions, and closer to the kind of "Buy American" economic regulation courts had upheld.

Currency note

This opinion was issued in 1984. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could Maryland constitutionally bar the state treasury from depositing funds in banks that lent money to apartheid-era South Africa?
According to this 1984 opinion, yes. The Attorney General approved House Bill 1267 for constitutionality, concluding that Maryland's restriction on where it deposited its own funds did not violate the Commerce Clause, the Supremacy Clause, or the federal government's foreign affairs power.

Why didn't this violate the Commerce Clause if it affected banks doing business with a foreign government?
The opinion explained that when a state acts as a "market participant," deciding for itself where to place its own money or with whom to do business, it is not subject to the usual Commerce Clause restrictions that apply when a state regulates private commerce generally. The opinion found Maryland's deposit decision fell into that market-participant category.

Did this kind of state law intrude on the federal government's control over foreign affairs?
The opinion concluded it did not, distinguishing it from a Supreme Court case that struck down an Oregon inheritance statute because that law required courts to scrutinize foreign governments' conduct and had a direct, significant effect on foreign relations. House Bill 1267, by contrast, applied only prospectively, reached only certain financial institutions, and was more comparable to "Buy American" economic legislation courts had upheld.

Background and statutory framework

House Bill 1267 amended state deposit practices by conditioning the State Treasurer's choice of financial institutions on certification of no South Africa-related lending. The opinion noted that similar legislation existed in several other jurisdictions, including Connecticut, the District of Columbia, Massachusetts, Michigan, and Nebraska. The analysis worked through three constitutional doctrines in turn: the "market participant" exception to Commerce Clause scrutiny recognized in a line of Supreme Court cases; Supremacy Clause preemption under treaties and the Export Administration Act's anti-boycott provisions, informed by an opinion from the Commerce Department's Anti-boycott Division; and the scope of the federal government's foreign affairs power, measured against a Supreme Court decision invalidating a state law found to intrude too far into matters of foreign relations.

Citations

Statutes:

• U.S. Const. Art. I, §8 (Commerce Clause)
• U.S. Const. Art. VI, Cl. 2 (Supremacy Clause)
• Export Administration Act, 50 U.S.C. §2401 et seq. (federal export control law)
• 50 U.S.C. §2407(c) (preemption of certain state laws touching foreign boycotts)
• 50 U.S.C. §2407(a) (federal anti-boycott prohibitions)
• Chapter 775, Laws of Maryland 1984 (enactment of House Bill 1267)

Cases:

• Pike v. Bruce Church, Inc., 424 U.S. 366 (1976) (states must balance local interest against burden on commerce)
• Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976) (a state acting as a market participant is not subject to usual Commerce Clause restrictions)
• Reeves, Inc. v. Stake, 447 U.S. 429 (1980) (market-participant distinction rests on state sovereignty and the state's role as trustee for its people)
• White v. Massachusetts Council of Const. Employers, 460 U.S. 204 (1983) (upholding a Boston hiring preference as market participation)
• United States v. Pink, 315 U.S. 203 (1942) (state law must yield when inconsistent with a treaty or international compact)
• Perez v. Brownell, 356 U.S. 44 (1958) (foreign affairs power rests in the President and Congress)
• Clark v. Allen, 331 U.S. 503 (1947) (not every state law with foreign effects is forbidden)
• KSB Technical Sales Corp. v. North Jersey District Water Supply Com'n, 381 A.2d 884, 898 (N.J. 1977) (upholding a "Buy American" statute that did not demonstrably impact foreign affairs)
• Zschernig v. Miller, 389 U.S. 429 (1968) (invalidating an Oregon inheritance law requiring judicial scrutiny of foreign governments)
• South Carolina v. Regan, 465 U.S. 367 (1984) (cited on the scope of federal power over state investment decisions)
• Pacific Gas & Elec. v. State Energy Resources Conserv. & Develop. Comm'n, 461 U.S. 190 (1983) (state control over economic matters can justify regulation touching federally reserved areas)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1984/Volume69_1984.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Constitutional Law-Commerce Clause-Federal Preemption-Foreign Affairs Power-Legislation Prohibiting Deposit Of State Funds In Banks Making Loans To South Africa Is Constitutional.

May 24, 1984

The Honorable Harry Hughes
Governor

We have received and hereby approve for constitutionality and legal sufficiency House Bill 1267. That bill prohibits the State Treasurer from depositing State funds in any financial institution unless the financial institution certifies in writing that it does not have any direct loans, or "foreknowledge" of any indirect loans, outstanding to the government of the Republic of South Africa or to any national corporation of the Republic of South Africa.1 The bill makes an exception for loans made by foreign or out-of-state financial institutions without the participation of the subsidiary or affiliated corporation with which the funds are to be deposited. The bill further provides that it does not apply to loans made prior to the effective date of the Act, which has been delayed until January 1, 1985.

The constitutional issues presented by House Bill 1267 are essentially threefold:

(1) Does the statute conflict with the Commerce Clause, U.S. Constitution, Art. I, §8?

(2) Does the statute contravene federal law, in violation of the Supremacy Clause, Art. VI, Cl. 2?

(3) Does the statute infringe on the federal foreign affairs powers?

For the reasons stated below, we conclude that the bill is not unconstitutional.

I
The Commerce Clause

Although Article I, §8 of the United States Constitution empowers Congress to "regulate Commerce with foreign Nations, and among the several States," it is well settled that the states may also regulate commerce except in areas preempted by Congress. In so doing, a state must balance the local interest with the burden on commerce and consider less burdensome alternatives. Pike v. Bruce Church, Inc., 424 U.S. 366 (1976).

Furthermore, if a state enters the market place as a participant, it is not subject to the usual Commerce Clause restrictions. Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976). Later cases have confirmed the holding of Alexandria Scrap. In Reeves, Inc. v. Stake, 447 U.S. 429 (1980), the Supreme Court recognized that the distinction between a state as market participant and a state as market regulator is based upon "considerations of State sovereignty, the role of each state as guardian and trustee for its people, and the long recognized right of trader or manufacturer, engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal." 447 U.S. 438-439.

The most recent case in this area is White v. Massachusetts Council of Const. Employers, 460 U.S. 204 (1983). In that case, the Supreme Court upheld an executive order of the mayor of Boston requiring that at least half of work crews on construction projects funded by the city consist of Boston residents. The Supreme Court found that the city was acting as a market participant, and in light of that finding, declined to consider the impact of the executive order on interstate commerce. This characterization was made despite that fact that the city, in choosing the parties with whom it would deal, had imposed hiring limitations on private firms as a condition of obtaining public construction contracts. White, 460 U.S. at 217 (Blackmun, J., concurring in part and dissenting in part).

House Bill 1267 does affect foreign commerce. However, it is clear, under these decisions, that the State, in deciding where to deposit its own funds, should be treated as a market participant and therefore is not subject to Commerce Clause restrictions. This is true even though the statute results in a limitation being placed on private financial institutions as a condition of acting as a depository for State funds.

II
Federal Preemption

Under the Supremacy Clause, state law must yield when it is inconsistent with or impairs the policy or provisions of a treaty or of an international compact or agreement. United States v. Pink, 315 U.S. 203 (1942). We have examined treaties in force with the Republic of South Africa and find no conflict with House Bill 1267.

We have also considered whether House Bill 1267 would conflict with the Export Administration Act, 50 U.S.C. §2401 et seq. or, in particular, the provisions of 50 U.S.C §2407(c) that preempt certain state laws pertaining to "participation in, compliance with, implementation of or the furnishing of information regarding restrictive trade practices or boycotts fostered or imposed by foreign countries against other countries." Because state investments would not appear to be exports under the Export Administration Act, we do not believe that House Bill 1267 offends the statute. Nor do we believe that the State is subject to the foreign boycott prohibitions of §2407(a) or that House Bill 1267 was intended to implement or participate in a boycott "fostered or imposed by foreign countries against other countries." This position is supported by Howard Fenton, of the Anti-boycott Division of the Commerce Department, who informs us that his office, in reviewing comparable statutes, has made an informal determination that such statutes have not been passed in conjunction with boycotts by foreign countries and therefore are not subject to the anti-boycott provisions of the Export Administration Act.2

III
The Foreign Affairs Power

Although the Constitution contains no specific grant of power to regulate foreign affairs, it has been recognized that such power, stemming from national sovereignty, rests in the President and the Congress. Perez v. Brownell, 356 U.S. 44 (1958). Thus, even though not every state law that has some effect in foreign countries is forbidden, legislation of this kind may not represent an impermissible intrusion into foreign affairs. Clark v. Allen, 331 U.S. 503 (1947); KSB Technical Sales Corp. v. North Jersey District Water Supply Com'n, 381 A.2d 884, 898 (N.J. 1977), appeal dismissed because of settlement, 435 U.S. 982 (1978) (upholding constitutionality of New Jersey "Buy American" statute, noting that the federal constitution permits certain regulation which does not "demonstrably" result in a direct impact on foreign affairs).

In Zschernig v. Miller, 389 U.S. 429 (1968), the Supreme Court invalidated an Oregon probate law conditioning a nonresident alien's right to inherit from Oregon residents on the alien's ability to show that his country would reciprocate as to United States citizens. In so doing, the Supreme Court voiced two separate concerns. One concern was that application of the statute, and others like it, had involved judicial scrutiny "concerning the actual administration of foreign law, into the credibility of foreign diplomatic statements, and into speculation whether the fact that some received delivery of funds should 'not preclude wonderment as to how many may have been denied the right to receive'". The other was that the statute as applied had a direct and significant effect on foreign countries, and could lead to repercussion for the entire United States, thus affecting foreign relations.

House Bill 1267 does, to some extent, represent a determination by the General Assembly with respect to the practices of the government of South Africa. However, it does not call for the level of state intrusion found repugnant in Zschernig. The impact of House Bill 1267 is cushioned to some extent by its prospective effect and by the fact that only certain financial institutions are affected. And, while the legislation, if duplicated in other states, does raise some possibility of retaliatory action that would affect the entire country, that possibility seems no greater than that presented by the "Buy American" law upheld in KSB. One additional basis for differentiating Zschernig can be found in the differing nature of federal power with regard to the acts involved. While the federal government has traditionally left matters of descent and distribution to the States, it could clearly set standards for inheritance by nonresident aliens. It is more questionable whether the federal government could bar the State from considering given factors when investing its own funds. Cf. South Carolina v. Regan, 465 U.S. 367 (1984).

Finally, it is important to note that this bill can be seen as an economic measure, and the State's control over economic matters may justify regulations that, on their face, relate to areas reserved to the federal government. See Pacific Gas & Elec. v. State Energy Resources Conserv. & Develop. Comm'n, 461 U.S. 190 (1983).

IV
Conclusion

In our view, these considerations provide support for the constitutionality of this legislation.

Stephen H. Sachs, Attorney General

Kathryn M. Rowe
Assistant Attorney General

Editor's Note: House Bill 1267 was signed into law as Chapter 775, Laws of Maryland 1984. See also Chapter 775, Laws of Maryland 1985 (restricting investment of State pension funds in companies doing business in South Africa). The preceding Opinion was originally written as a bill review letter. Because of the significance of, and public interest in, the legislation, the letter is published here in a slightly revised format.

1 Similar legislation has been passed in several other jurisdictions. See Conn. Gen. Stat. §3-13f; D.C. Code Ann. §47-342; Mass. Gen. Laws Ann. Ch. 32, §23(1)(d)(vi); Mich. Res. 462, (Feb. 6, 1978); Neb. Legis. Res. 43, 86th Legis., 2d Sess. (1980). To the best of our knowledge, none of these provisions have been challenged.

2 The Commerce Department reviewed the Connecticut and District of Columbia statutes cited in note 1 above.