# Petition for Writ of Certiorari — Lubman v. Mayor of Baltimore City

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0713%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1990
- **Citation:** 493 U.S. 1093

## Text

89-889

No.

Suprema Court, U,8,

FILED
NOV 30 360

SPAN
CLERK "a

In The

Supreme Court of the United Stat
October Term, 1989

,™
—

YALE LUBMAN, THOMAS J. MURPHY,
JOHN S. SEISS AND JOSEPH STEWART,

eee.

es

Petitioners,

MAYOR AND CITY COUNCIL OF
BALTIMORE CITY,

Respondents.

>

PETITION FOR A WRIT OF CERTIORARI

TO THE MARYLAND COURT OF APPEALS

>

DoucLas FOSTER
*MARrTIN S. KAUFMAN
*Counsel of Record

ATLANTIC LEGAL FOUNDATION

205 East 42nd Street
New York, NY 10017
(212) 573-1960
Attorneys for Petitioners

COCKLE LAW BRIEF PRINTING CO,, (800) 225-6964
OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

Ordinances adopted by the City of Baltimore, similar to
many such state, city and county statutes and ordinances
involving hundreds of billions of dollars of assets, require the
trustees of public employee pension funds to divest those
funds of securities of all American companies doing business
in South Africa and bar the trustees from buying any such
securities.

The questions presented are:

1. Does local legislation that seeks to influence the internal
policies of a foreign nation and by its mandate thereby passes
judgment upon those policies impermissibly intrude upon the
exclusive power under the Constitution of the Federal Gov-
ernment to conduct foreign relations?

2. Does local legislation that restricts the purchase and sale
of billions of dollars of securities, based on whether the
securities issuers do business in a foreign nation, violate the
Commerce Clause of the United States Constitution and
infringe upon the power of the Federal Government to regu-
late interstate and foreign commerce?

3. Is local legislation that seeks to pressure American com-
panies to stop doing business in South Africa preempted by
the Federal Government’s policy which encourages American
companies to do business in South Africa?

4. Does local legislation that reduces the value of the bene-
fits paid to beneficiaries from public employee pension trust
funds, contributions to which were made by the beneficiary-
petitioners, effect a taking of the petitioners’ property without
due process and therefore violate the Fifth and Fourteenth
Amendments to the United States Constitution and also vio-
late the impairment of contract clause of Art I, § 10 of the
Constitution?

il

PARTIES TO THE PROCEEDING

The parties before the Maryland Court of Appeals were:
The Board of Trustees of the Employees’ Retirement System
of the City of Baltimore, The Board of Trustees of the Fire
and Police Employees’ Retirement System of the City of
Baltimore, The Board of Trustees of the Elected Officials’
Retirement System of the City of Baltimore, Hyman Aaron
Pressman, Charles H. Whittum, Jr., William E. Dix, Harry
Deitchman, Bishop L. Robinson, Henry G. Parks, Jr., Kenneth
P. Taylor, Charles F. Peace, HI, Edward C. Heckrotte, Sr.,
Gary W. McLhinney, Mildred Zink, Yale Lubman, Thomas J.
Murphy, John S. Seiss, Joseph Stewart and the Mayor and
City Council of Baltimore. The plaintiff trustees of the pen-
sion funds have not petitioned for a writ of certiorari. The
sole petitioners are the intervenor-beneficiaries, Yale Lub-
man, Thomas J. Murphy, John S. Seiss and Joseph Stewart.

ili

TABLE OF CONTENTS

Page

og kG ys » Sr i
PARTIES TO THE PROCEEDING................... ii
ee eee ve Nawee ne weep pes Oe ses I
ee ose yc aee chee oe ee poner ck sees 2
8) 2
Dueeeememeee GOP Pete CASE... 2. ccc cecceccccces: 2
REASONS FOR GRANTING THE WRIT ............ 7

I. This Case Involves Important Issues of Law That

Should be Resolved By This Court............. 7
a ES er ern 7

i UI ooo vcctor sewer causes ees 13
he gE ane Wis wae Nw ee pe Moe ees 17

Te eT eee ee ere 21

Il. The Decision is in Conflict With an Important Deci-
Ee aed cs oa vg CaS Coe ee A ees 25

Ill. The Decision is in Conflict With Decisions of the
Highest Courts of Other States ................. 27

i odode se sy 06-0 en vee 608 ree 30

NS ee A-1

iv

TABLE OF AUTHORITIES

Page
CasEs
A&P Tea Co. v. Cottrell, 424 U.S. 366 (1976)......... 17
Allied Structural Steel Co v. Spannaus, 438 U.S. 234
CEPR ca Gh CrE es Siu ks dee ck dew Eee Ole een aN) 21
Armstrong v. United States, 364 U.S. 40 (1960)........ 20
California v. ARC America Corp. __U.S.__, 109
SAA SOGR, TO Eee OO CESOPR cc acca seeidsvavss 22
City of Burbank v. Lockheed Air Terminal, Inc., 411
Sa PE a Sc acc ue anaes ce Ke Pens oe eRe h ees 25
Char 0: AG Bee Sie ee CRT ir ocd cvneueyysesetas at
Connolly v. Pension Ben. Guar. Corp., 475 U.S. 211
D ) SRR RRR ERE pat CANE ER ry g ah Sat 5 Umer ar ee 6, 19
Dean Milk Co. v. Madison, 340 U.S. 349 (1951)....... 17
Edgar v. Mite Corp., 457 U.S. 624 (1982)............. 16
Hillsborough County v. Automated Medical Laborato-
ae ee ee el er 22, 23
Hines v. Davidowitz, 312 U.S. 52 (1941) ....... 10, 22, 23
Hughes vy. Alexandria Scrap Corp., 426 U.S. 794
CRP POE ass paws ndak eves Vater yp Geeae ee eeeaeeekewes ee
Japan Line, Ltd. v. County of Los Angeles, 441 U.S.
Bae CRs hack Pa ccaneesdewelioren aerate ian 14
Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976)..... 14

Michigan Canners & Freezers Association v. Agri-
cultural Marketing and Bargaining Board, 467 U.S.
461 (1984) 25

onprvece € eC WTS CO Ce 6 eb 6.6 8 EO 2S Oe we SSS RS Oe. OO Oe

TABLE OF AUTHORITIES — Continued

New York Times Company v. City of New York Com-
mission on Human Rights, 41 N.Y.2d 345, 361
oe we BB gs rere Pe reer err errr

Nollan v. California Coastal Comm'n, 483 U.S. 825
CODE ao ce iodeas dead aha ene eee eee

Pacific Gas & Electric Co. v. State Energy Resource
Conservation and Development Comm'n, 461 U.S.
EGR CRs Sse oh edeesceonsaccaiv eure eeeeeess

Penn Central Transportation Co. v. New York City,
ee a ee ey err eee

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970)....

Reeves, Inc. v. Stake, 447 U.S. 429 (1980).........

Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1974)....

South-Central Timber Development, Inc. v. Wunnicke,
SGT US. Be Ce 6 sce es ca leewss wes seeous

Springfield Rare Coin Galleries, Inc. v. Johns, 115
1.20 221, SOS W.2G SO CIGSS) noes ceck een ns

Tayyari v. New Mexico State University, 495 F.Supp.
SOS. GERI As Fe dna saunie can ke easews wanes

United Building and Construction Trades Council of
Camden v. Mayor and Council of the City of Cam-

den, 468 Ge. Bee ee a6 os vv anedencke ete es
United States v. Belmont, 301 U.S. 324 (1937)......

United States v. Curtiss-Wright Export Corp., 299

U8. Fe CIPI i a.s vscdecasdnsacesneeeinerces.

United States v. Glen Cove, 233 F. Supp. 145
(E.D.N.Y.), aff'd per curiam, 450 F.2d 884 (2d Cir.

SFE voce ceccevenesi0e¥0bse «eee e reer eteae

Page

vi

TABLE OF AUTHORITIES — Continued

Page

United States v. Pink, 315 U.S. 203 (1942)............ 10
United States Trust Company of New York v. New

Jeveey,, Fat WH. UGG os oa eee ene 20
White v. Massachusetts Council of Construction

Employers, Inc., 460 U.S. 204 (1983) ............. A

Wickard v. Filburn, 317 U.S. 111 (1942) .......... 14, 16

Zschernig v. Miller, 389 U.S. 429 (1968)
eee Perey e et, i re ee ee 3. 18, i ML 4

CONSTITUTION, STATUTES AND ORDINANCES

United States Constitution

Avtheie 4, 8 Gina cc dvicc eh otek dente eee 13
ATUGEG 3, 4 UG nokia vevideeniase eee 10-11, 20, 21
ATOMS. FF occ ccenccvccesacnent vee ae
pe er rrr er rere rer 17

Anti-Apartheid Act of 1985; Hearings before the Sen-
ate Comm. on Banking, Housing and Urban Affairs
and the Senate Subcomm. on International Finance
and Monetary Policy on S.635, 99th Cong., Ist

SOUG., FOR. cn snack nas deek tens Tete e eee 24
Comprehensive Anti-Apartheid Act of 1986, Pub. L.

99-440, 100 Stat. 1086 (1986).................... - ae
Baltimore CHNGRMMROR TOG, FOS cose civicc neds cesecussuben 2
Bakimosve OCedemenee MO. Tis co icc its bi vencdeiecueeeee: 2
Baltimore Wis FG. GT iwc oi oe vse eas oe ee ee ee 2

Exec. Order No. 12532, 3 C.F.R. § 387 (1983S).......
vw

In The

Supreme Court of the United States
October Term, 1989

&
vw

YALE LUBMAN, THOMAS J. MURPHY,
JOHN S. SEISS AND JOSEPH STEWART,

Petitioners,

MAYOR AND CITY COUNCIL OF
BALTIMORE CITY,

Respondents.

7
4

PETITION FOR A WRIT OF CERTIORARI
TO THE MARYLAND COURT OF APPEALS

y%
Vv

The petitioners Yale Lubman, Thomas J. Murphy, John S.
Seiss and Joseph Stewart respectfully pray that a writ of
certiorari issue to review the judgment and opinion of the
Maryland Court of Appeals, entered in the above-entitled
proceeding on September 1, 1989.

DECISIONS BELOW

The decision of the Maryland Court of Appeals is
reported at 317 Md. 72 (1989) and is reproduced at Appendix
(App.) D. Page references are to the version in the appendix.
The decision of the Circuit Court for Baltimore City is unre-
ported. It is reproduced at Appendix E.

2

JURISDICTION

The decision of the Maryland Court of Appeals, a final
decision by the highest state court in Maryland, review of
which is sought in this petition, was entered and filed on
September 1, 1989. This Court has jurisdiction over this
matter pursuant to 28 U.S.C. § 1257(a).

STATUTES INVOLVED

The relevant sections of the United States Constitution
are set forth in Appendix A. The Comprehensive Anti-Apart-
heid Act of 1986 is set forth in Appendix B. The Baltimore
Ordinance pertaining to the Employees Retirement System
and the Fire and Police Employees Retirement System is set
forth in Appendix C, as is its predecessor Bill.

STATEMENT OF THE CASE

In 1986, the Baltimore City Council passed, and on July
3, 1986 the Mayor of Baltimore signed, Ordinance No. 765,
which provides, among other things, that no funds of the
Employees Retirement System and the Fire and Police
Employees Retirement System (two pension plans for retired
employees of the City of Baltimore, Maryland) shall remain
invested in, or in the future shall be invested in, the securities
of any company doing business in or with South Africa. App.
C-2, C-3-4. Subsequently, Ordinance No. 792 was passed with
substantially the same provisions to cover the Elected Offi-
cials Retirement System. App. D-S5.

Ordinance No. 765 and Ordinance No. 792 (the “Ordi-
nances”) were passed to implement and carry out the purpose
of Bill No. 677, which in its “whereas” clauses denounced the
government of South Africa for its “morally repugnant” pol-
icy of apartheid and asserted that the investment of American
capital in South Africa contributed to “the maintenance and
enforcement of apartheid.”” App. C-9. Ordinance No. 765
(Ordinance No. 792 is ommitted as redundant) and Bill No.
677 are reproduced at Appendix C. The Ordinances are simi-
lar to many such statutes and ordinances enacted by other

3

States, cities and counties throughout the country which seek
to limit or bar investment by U.S. companies in politically
“disfavored” countries.

Under each of the Baltimore pension systems, members
are entitled to specific future benefits (defined benefits). The
systems also provide for “variable benefits” programs which
result in additional payments for retirees directly related to
the rate of return earned by the funds. If the rate of return in a
given year exceeds 7.5%, all of the excess between 7.5% and
10% is allocated for the payment of additional benefits. If the
rate of return exceeds 10%, one-half of the excess over 10%
is allocated to the payment of additional benefits while the
City receives the other haif. App. D-2.

The trustees of the three City of Baltimore employee
pension funds (the Employees Retirement System, the Fire
and Police Employees Retirement System and the Elected
Officials Retirement System) challenged the constitutionality
of the Ordinances.

At the inception of the lawsuit four beneficiaries, peti-
tioners herein, one current and one retired member of each of
the two major pension systems, the Employees Retirement
System and the Fire and Police Employees Retirement Sys-
tem, moved to intervene. The Circuit Court for Baltimore City
reserved decision on the intervention motion, but permitted
the beneficiaries to move for summary judgment, along with
the trustees, and to argue and brief the merits. In their
motions for summary judgment the trustees and beneficiaries
challenged the Ordinances on the following grounds:

1. the ordinances intrude on the exclusive power

of the Federal Government to conduct foreign
relations under the Constitution;

2. they infringe on the power of the Federal Gov-
ernment to regulate interstate and foreign com-
merce and violate the Commerce Clause;

3. they are preempted by the policy of the Federal
Government toward South Africa and the Com-
prehensive Anti-Apartheid Act of 1986;

4. they work a taking of the beneficiaries property
without due process and violate their rights
under the Fifth and Fourteenth Amendments;

4

5. they impair the contracts between the benefici-
aries and the City in violation of Article I, § 10
of the Constitution.

The Circuit Court denied the motions for summary judg-
ment, except for the claim of impairment of contract, which it
set down for trial to hear evidence concerning the financial
impact of the Ordinances. The Circuit Court also denied the
beneficiaries’ motion to intervene.

After trial, the Circuit Court filed its Opinion and Order,
dated July 17, 1987, upholding the constitutionality of the
Ordinances. The Circuit Court found that the Ordinances
barred investments in 120 of the 500 companies on the Stan-
dard & Poor’s 500 (“S&P 500”) list and that these companies
represent approximately 40% of the market capitalization of
the S&P 500. App. E-23. The Circuit Court further found that
the initial cost of divestment would be $750,000 and the
ongoing cost would be $1.2 million per year. App. E-30-31.
Concluding that the Ordinances would minimally impact the
pension funds, the Circuit Court rejected the impairment of
contract argument.

The trustees and beneficiaries thereupon appealed to the
Maryland Court of Special Appeals, but, at their request, the
Maryland Court of Appeals issued a writ of certiorari allow-
ing a direct appeal to the highest court of Maryland because
of the importance of the issues.

On September 1, 1989, the Maryland Court of Appeals
(sometimes the “Maryland court”) rendered its decision. It
held that the trial court erred in not permitting the benefici-
aries to intervene and modified that judgment by granting the
beneficiaries’ motion to intervene. In all other respects the
Maryland Court of Appeals affirmed the Circuit Court.

The Maryland Court of Appeals addressed each of the
issues raised by the trustees and beneficiaries. In doing so the
Maryland court operated from the premise that the purpose of
Baltimore in enacting the Ordinances “was simply to ensure
that the City’s pension funds would not be invested in a
manner that was morally offensive to many Baltimore resi-
dents and many beneficiaries of the pension funds.” App.
D-61. With respect to the argument of petitioners that the

of the pension funds,” App.
D-61, this Court should examine the Maryland court’s deci-
sion in light of Armstrong v. United States, 364 U.S. 40, 49
(1960), where this Court said that one of the principal pur-
poses of the Taking Clause is “to bar Government from
forcing some people alone to bear public burdens which, in
all fairness and justice, should be borne by the public as a
whole.” See also, Nollan, supra, at 836, n.4.

Here the beneficiaries are being forced to bear the whole
burden of the political statement of the City Council on behalf
of the City of Baltimore vis-a-vis the government of ,South
Africa. Under the learning of Armstrong, supra, this was a
“taking” and this Court should consider this case for that
reason.

Furthermore, as the Maryland court recognized, the pen-
sion plans created contractual duties on the part of the City
toward persons with vested rights under the plans. App.
D-27-28. It further recognized that the beneficiaries had con-
tractual rights to the variable benefits. App. D-28, n.26.
However, the Maryland court erroneously concluded that the
beneficiaries’ contractual rights were not impaired because
although the divestment costs would “diminish the level of
the future variable benefits”, App. D-29, the costs are so
minimal that they do not “approach the constitutional stan-
dard for impairment.” App. D-30.

Under the Contract Clause of the United States Constitu-
tion, Article I, § 10, the City of Baltimore cannot impair its
contracts with private individuals unless it demonstrates that
its action is “reasonable and necessary to serve an important
public purpose.” United States Trust Company of New York v.
New Jersey, 431 U.S. 1, 25 (1977).

> The four petitioner-beneficiaries have not expressed am opinion
~ that investing in securities of companies such as General Motors, IBM
and Mobil is morally offensive to them nor is there any evidence in the
record that any beneficiaries shared that view.

21

By requiring the trustees to sell the pension funds’
investments in 120 of the 500 leading S&P companies, by
requiring divestment of 47% of the pension funds’ equity
portfolio and by causing an annual diminishment of the pen-
sion funds’ earnings of $1.2 million, there was an impairment
of the contract between the City and the beneficiaries.

Were the Ordinances “reasonable and necessary to serve
an important public purpose?” Under Allied Structural Steel
Co. v. Spannaus, 438 U.S. 234 (1978), the City had the burden
to meet this standard. The action taken by the City that
impaired the beneficiaries’ contracts with the City did not
advance an important public purpose nor was it reasonable or
necessary, aS discussed, supra.

This Court should reverse the Maryland court which
erroneously applied Art. I, § 10 of the Constitution.

D. Preemption

Petitioners argued that the Comprehensive Anti-Apart-
heid Act of 1986, Pub. L. 99-440, 100 Stat. 1086 (1986),
codified at 22 U.S.C. §§ 2151, 2346 (a), 5001-5116, pre-
empted state and local divestment legislation, and that the
federal government’s overall policy of encouraging the pres-
ence of American business in South Africa so as to promote
the economic development of all South Africans, occupied the
field. The Maryland court addressed and rejected the first
argument, but did not address the second.

The Maryland court was wrong in holding that the Com-
prehensive Anti-Apartheid Act of 1986 (the “Act”) did not
preempt local and state divestment legislation. The Act itself
States, in Section 4:

“The purpose of this Act is to set forth a compre-

hensive and complete framework to guide the

efforts of the United States in helping to bring an

end to apartheid in South Africa and lead to the

establishment of a nonracial, democratic form of

government. This Act sets out United States policy
toward the Government of South Africa, the victims

of apartheid, and the other states in southern Africa.

It also provides the President with additional

22

authority to work with the other industrial
democracies to help end apartheid and establish
democracy in South Africa.”

(emphasis added).

The Act proscribes certain business and economic activity by
American companies in and with South Africa but does not
provide for divestment, even though Congress was well aware
of divestment as a possible sanction when it considered the
Act. Indeed, the concept of divestment was discussed and
rejected. 132 Cong. Record S 11856 (Aug. 15, 1986).

The traditional preemption analysis, as most recently
explicated by this Court in California v. ARC America Corp.,
__ U.S. __, 109 S.Ct. 1661, 1665, 104 L.Ed.2d 86 (1989),
requires a court to make three inquiries with respect to federal
legislation and the state or local legislation allegedly pre-
empted: first, has Congress expressly stated its intent to
supersede state law through the enactment of the statute in
question; second, even in the absence of express preemptive
language, has Congress legislated so comprehensively that
federal law “occupies the field,” leaving no room for state
regulation; third, even when Congress has not occupied the
entire field, is state law nevertheless preempted because it
conflicts with federal law.

In the case at bar, the second and third criteria are clearly
met, and local legislation is preempted by the Act. The Act
declares itself to be “comprehensive and complete.” This,
combined with the exclusive federal foreign relations power,
occupies the field, leaving no room for local divestment
legislation. See, Pacific Gas & Electric Co. v. State Energy
Resource Conservation and Development Comm'n, 461 U.S.
190, 204 (1983). Moreover, the Ordinances “stand as an
obstacle to the accomplishment and execution of the full
purposes and objects of Congress.” Hines v. Davidowitz, 312
U.S. 52, 67 (1941); Hillsborough County v. Automated Medi-
cal Laboratories, Inc., 471 U.S. 707, 713 (1985). In addition
to declaring itself to be comprehensive and complete, the Act
also explicitly gives the President (not the states or localities)
“additional authority” to help end apartheid in South Africa.
Clearly, Congress intended to arm the President with the

;

23

flexibility to take measured steps to bring about change in
South Africa. If-Congress is not satisfied with those steps, it
is for the national legislature, not each local, parochial body,
to enjoin upon the President appropriate changes in United
States policy.

Moreover, the customary caution with which the federal
judiciary approaches preemption is not warranted here, for the
conflict is not between a federal statute and a local ordinance
in a field of shared federal-state authority. The Ordinances are
not an exercise of “historic police powers of the State,” Rice
v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947), but an
intrusion into an area reserved exclusively for the federal
government. Thus there is no presumption against preemp-
tion, and, we submit, there should be a presumption in favor
of preemption. Cf., Hillsborough County v. Automated Medi-
cal Laboratories, Inc., supra, at 715. Contrary to the Mary-
land court’s statement, App. D-48, the regulation of foreign
investment by residents of the locality is not an exercise of
traditional police power. Indeed, it is virtually unprecedented.

Thus, the Act, by its terms, “occupies the field” and
preempts state and local activity.

The second preemption theory is a corollary to the for-
eign policy argument. The principle is that in the area of
foreign affairs the federal government occupies the field
(Hines v. Davidowitz, supra) and here, where the federal
government has established a comprehensive and complete
policy which includes encouraging American business to
remain in South Africa, the local legislation is preempted.®
The Ordinances and the other local divestment legislation
directly undermine the federal government’s policy which
encourages American companies to do business in South

© Sometimes this principle is referred to as the “dormant federal
foreign relations power.” See, e.g., Damrosch, Foreign States and the
Constitution, 73 Va.L.Rev. 483, 507 et. seg. (1987).

24

Africa so that those companies can work to ameliorate the
economic and social conditions of blacks in South Africa.’

In his message to Congress, Message to Congress on U.S.
Actions, 21 Weekly Comp. Pres. Doc. 1054, 1055 (Sept. 16,
1985), accompanying Exec. Order No. 12532, 3 C.F.R. § 387
(1985) which imposed certain economic sanctions on South
Africa, former President Reagan (echoing the language of the
leading decisions of this Court construing the exclusivity of
federal foreign relations competence) stated that “[iJn order
for this Nation successfully to influence events in [South
Africa], it is necessary for the United States to speak with one
voice and to demonstrate our opposition to apartheid by

7 As Deputy Secretary of State Kenneth Dam described United
States’ policy in 1985:

“Disinvestment would signal a U.S. unwillingness to pursue
the only logical course of action open to us, which is attempt-
ing to promote peaceful change in South Africa. Withdrawal
of U.S. business interests would remove one of the few tools
of influence available to us in helping to promote change and
would leave a moral void that would result in lessening of
both regional U.S. influence and our ability to help influence
movement away from apartheid. Disinvestment would clearly
embolden [communist elements] to increase assistance to
radical forces to push for the revolutionary overthrow of the
South African Government. Besides this psychological and
political signal, U.S. disinvestment could contribute to unem-
ployment and unrest, with not only 70,000 workers [sic] jobs
being jeopardized but the livelihood of the approximately
400,000 others who depend on them for support. This would
increase the great social unrest already widespread in that
country. We do not think this is what America is about.”

The Anti-Apartheid Act of 1985; Hearings Before the Senate Comm. on
Banking, Housing and Urban Affairs and the Senate Subcomm. on
International Finance and Monetary Policy on S. 635, 99th Cong., Ist
Sess., 103. See also, Address by Secretary of State George P. Shultz
before the Business Council for International Understanding, Sept. 29,
1987, p. 16, where he stated that the Administration “strongly supports
the continued presence of American business in South Africa.”

aed Bir ee

NN Ee ne a

25

taking certain actions directed specifically at key apartheid
policies and agencies.” (emphasis added) The mischief of
local divestment legislation is that it causes the United States
to speak with many voices, creating dissonance and uncer-
tainty as to the United States policy on this important foreign
relations issue. Such legislation also diminishes the ability of
the national government to utilize measured actions or
responses to encourage developments the United States favors
without the unnecessary risk of retaliation which might affect
the whole country, not just the states or cities that took the ill-
advised hostile action. Diplomacy is a business of subtlety
and timing, which requires finesse and coordination, not
Opportunistic political grandstanding or intemperate “moral
Outrage”.

The Maryland court incorrectly ignored the argument that
the federal government’s foreign policy toward South Africa
of encouragement of American business to participate in that
country’s economy preempts state and local divestment and
procurement legislation which seeks to cause American com-
panies to disengage from South Africa. In ignoring peti-
tioners’ argument the Maryland court slight-d the teachings
of this Court in such cases as Zschernig v. Miller, 389 U.S.
429 (1968); City of Burbank v. Lockheed Air Terminal, Inc.,
411 U.S. 624 (1973); and Michigan Canners & Freezers
Association v. Agricultural Marketing and Bargaining Board,
467 U.S. 461 (1984).

II. The Decision Is In Conflict With An Important Deci-
sion of This Court

In Zschernig v. Miller, 389 U.S. 429 (1968), this Court
held that an Oregon escheat statute was invalid because the
State was using that law to condemn the internal policies of
other nations, in particular communist countries. Even though
the Ordinances and other divestment legislation likewise con-
demn the internal policies of South Africa, the Maryland
court reached a decision that is in conflict with the reasoning
of Zschernig.

26

The teaching of Zschernig is that if a local statute poten-
tially intrudes upon the exclusive power of the federal gov-
ernment to conduct foreign policy, the statute is
unconstitutional. In Zschernig, the federal government specif-
ically refrained from certifying that the application of the
Oregon statute unduly interfered with the United States’ con-
duct of foreign relations. Indeed, the State Department had
advised this Court that the statute had “little effect on the
foreign relations and policy of this country.” Memorandum
for the United States at 5, cited in 80 Northwestern Law Rev.
352, n. 236. Nonetheless, because the statute had merely the
“potential for disruption or embarrassment,” this Court held it
to be unconstitutional. The rationale of Zschernig, in addition
to its vindication of the exclusive federal foreign policy
power, was that the Oregon statute made criticism of foreign
governments by states unavoidable. 389 U.S. at 441-42. Here,
criticism of a foreign state is not merely a likely future event,
it is an accomplished fact. Not only is there a potential
intrusion on the federal foreign relations power, the intrusion
is actual. Justices Stewart and Brennan, concurring in Zscher-
nig, concluded, simply and directly, that the Oregon statute
was unconstitutional on its face because the state legislature
by passing a law that prejudiced “a nation whose policies it
disapproved has trespassed upon an area where the constitu-
tion contemplates that only the National Government shall
operate.” 389 U.S. at 442.

The Maryland court missed the essence of Zschernig. It
concluded that because “the effect of the Ordinances on South
Africa is minimal and indirect,” App. D-61, they did not
interfere with the sovereign right of the federal government to
conduct foreign policy.*® The rationale of Zschernig, however,
is that if a local government purports to sit in judgment of a

8 Although the trial court recognized “the exciusive Federal power
to conduct foreign affairs,” App. E-16, it concluded that the Ordinance
did not violate that exclusive power because it had not brought “an end to
apartheid.” Under this reasoning, a city or state could forbid all trading
with Iron Curtain countries but if those governments did not renounce
communism, the legislation forbidding trade would be valid.

ene ee ren

ee ee cores

ee ee ey ae eee eS

27

foreign power, the potential interference with American for-
eign policy is enough to create a conflict with the Constitu-
tion. The Maryland court failed to consider the real purpose
of the Ordinances and other divestment legislation and the
“great potential for disruption or embarrassment” (Zschernig
at 443) which such legislation has.?

The Maryland court also tried to distinguish Zschernig by
emphasizing that in Zschernig this Court was concerned that
the Oregon courts, and courts in states with similar statutes,
would engage in criticism of the nature and conduct of for-
eign governments. App. D-59. The rule of Zschernig, of
course, is not limited to acts of state courts, but extends to the
acts of any state government agency. The Maryland court
ignored the obvious fact that the most blatant and severe sort
of criticism of a foreign power lies behind divestment
legislation.

One distinction between the case at bar and Zschernig
makes this an even more compelling case for a restatement of
federal foreign policy exclusivity and supremacy: in Zscher-
nig there was only a potential impact on United States foreign
relations; in the instant case, the Maryland court found that
there is actual impact on our foreign relations, App. D-62;
that alone requires reversal under Zschernig and its
antecedents.

III. The Decision is in Conflict With Decisions of The
Highest Courts of Other States

The decision and reasoning of the Maryland court is also
in conflict with the decisions and reasoning of the highest

9 In avoiding the thrust of Zschernig the Maryland courts mis-
takenly relied on Clark y. Allen, 331 U.S. 503 (1947), in which this Court
upheld a statute similar to the one at issue in Zschernig. In Clark the
purpose of the statute, and therefore its potential impact, was not in issue,
according to this Court’s opinion in Zschernig. In Zschernig it was, as it
is here. In light of the Maryland court’s reliance on Clark, this Court
should take this case to clarify and reemphasize Zschernig so that a clear
principle is enunciated: state and local governments cannot adopt legisla-
lion that may impact on the conduct of foreign policy.

28

courts of New York and Illinois in analogous cases involving
Statutes that had as their purpose condemnation of the policies
of South Africa.

In Springfield Rare Coin Galleries, Inc. v. Johns, 115
11l.2d 221, 503 N.E.2d 300 (1986) the Supreme Court of
Illinois struck down a statute which created an exemption
from Illinois occupancy_and use tax statutes for transactions
in the legal tender of all nations except South Africa. The
Illinois Supreme Court stated that:

“The undisputed purposes of the exclusion are

to express disapproval toward South Africa and to

discourage investment in its products. We thus hold

that the exclusion is an impermissible encroachment

upon a national prerogative — the authority of the

federal government to conduct foreign affairs.”
Id., at 226.

The same analysis was undertaken by the New York State
Court of Appeals in New York Times Company v. City of New
York Commission on Human Rights, 41 N.Y.2d 345, 361
N.E.2d 963 (1977) where the court struck down the deter-
mination of the New York City Commission on Human Rights
that advertisements for jobs in South Africa were discrimina-
tory. The court recognized that the purpose of the Commis-
sion was “to impose an economic boycott aimed at the present
government of the Republic of South Africa.” 41 N.Y.2d at
351, 361 N.E.2d at 968. The court did not consider whether
the action of the City Human Rights Commission in fact had
any impact on South Africa or our conduct of foreign affairs
with South Africa. The Court of Appeals stated:

It was beyond the ken of the City Commission on

Human Rights to enforce local antidiscrimination

laws by imposing an economic boycott of the

Republic of South Africa. In this very case, the

commission conducted an inquiry that might have

been considered offensive by the Republic of South

Africa and which might have been an embarrass-

ment to those charged with the conduct of our

Nation’s foreign policy. The true danger is that if

New York City could do this in one instance, it

could do so in many instances. Each locality in each

- 29

State may not adopt its own foreign policy. This
would be disastrous, not only because of multi-
plicity and divergence of policies, but because local
decisions are often influenced by pragmatic local
considerations which are not necessarily controlling
or even relevant to national policy as determined by
the Federal Government at Washington.

Id., 41 N.Y.2d at 353, 361 N.E.2d at 969.

The Baltimore Ordinances at issue in this case are like-
wise a potential embarrassment to those charged with the
conduct of foreign relations, and were motivated by local,
parochial, political considerations which diverge from those
controlling the foreign policy of the United States.

The Maryland Court of Appeals sought to distinguish
Springfield Rare Coin Galleries and New York Times Co. by
asserting that “although the Ordinances might be viewed as
having some tangential effect on economic relations between
American firms and South African businesses or government,
their impact on foreign affairs is far smaller than New York
City’s action... or that of Illinois ....” App. D-65. Not only
is the statement incorrect in view of the massive impact of all
local divestment legislation, or even the divestment caused to
the Baltimore pension funds alone of $400 million in stock,
but it is unsupported in the record. Moreover, implicit is
recognition by the Maryland court that the Ordinances have
actual impact on this nation’s foreign relations; this conces-
sion alone is sufficient to warrant review and reversal under
Zschernig.

30
CONCLUSION

The decision of the Maryland Court of Appeals incor-
rectly addresses several critical issues of national importance:
the intrusion of local governments in the conduct and articula-
tion of this nation’s foreign policy; whether local govern-
ments may bar the purchase and sale of billions of dollars of
securities under the Commerce Clause; the application of the
market participant doctrine to foreign commerce and to the
use of funds partly the property of the beneficiaries, not the
city; whether the reduction of the value of public pension
trust funds to satisfy the political and moral desires of local
governments works a taking of the property of the benefici-
aries Of those funds or is an impairment of the contracts
between the city and the beneficiaries; and preemption in the
areas Of foreign relations and foreign commerce by the fed-
eral government of local divestment legislation. Review by
this Court is necessary.

Petitioners respectfully urge this Court to grant this peti-
tion for writ of certiorari and reverse the decision and judg-
ment of the Maryland Court of Appeals.

Dated: November 30, 1989

Respectfully submitted,

DouG.Las FOsTER
*MARTIN S. KAUFMAN
*Counsel of Record

ATLANTIC LEGAL FOUNDATION
205 East 42nd Street

New York, NY 10017

(212) 573-1960

Attorneys for Petitioners

A-1

APPENDIX A
UNITED STATES CONSTITUTION
Article I
Section 8. . . .The Congress shall have Power. . . .To

regulate Commerce with foreign Nations, and among the
several States... .

Section 10. No State shall enter into any Treaty, Alli-
ance, or Confederation; ... pass any ... Law impairing
the Obligation of Contracts... .

No State shall, without the Consent of Congress... .
enter into any Agreement or Compact with... a foreign
Power, or engage in War, unless actually invaded, or in
such imminent Danger as will not admit of delay.

Article II

Section 2. The President . . . - shall have Power, by
and with the Advice and Consent of the Senate, to make
Treaties, provided two-thirds of the Senators present con-
cur; and he shall nominate, and by and with the Advice
and Consent of the Senate, shall appoint Ambassadors

Article VI

.... This Constitution, and the Laws of the United
States which shall be made in Pursuance thereof; and all
Treaties made, or which shall be made, under the Author-
ity of the United States, shall be the supreme Law of the
Land; and the Judges in every State shall be bound
thereby, any Thing in the Constitution or Laws of any
State to the Contrary notwithstanding ... .

A-2

Amendment V

No person shall. . . .be deprived of . . . property,
without due process of law; nor shall private property be
taken for public use, without just compensation.

Amendment XIV

Section 1..... No State shall make or enforce any law
which shall abridge the privileges or immunities of citi-
zens of the United States; nor shall any State deprive any
person of life, liberty, or property, without due process of
law; nor deny to any person within its jurisdiction the
equal protection of the laws.

it

B-1

APPENDIX B

PUBLIC LAW 99-440 [H.R. 4868]:
October 2, 1986

COMPREHENSIVE ANTI-APARTHEID
ACT OF 1986

For Legislative History of Act see Report for
P.L. 99-440 in Legislative History Section, post.

An Act to prohibit loans to, other investments in, and
certain other activities with respect to, South Africa, and
for other purposes.

Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled,

SHORT TITLE

SecTION 1. This Act may be cited as the “Compre-
hensive Anti-Apartheid Act of 1986”.

TABLE OF CONTENTS

Sec. 2. The table of contents of this Act is as follows:

Sec. 1. Short title.

Sec. 2. Table of contents.
Sec. 3. Definitions.

Sec. 4. Purpose.

TITLE I - POLICY OF THE UNITED STATES
WITH RESPECT TO ENDING APARTHEID

Sec. 101. Policy toward the Government of South
Africa. : ;

Sec. 102. Policy toward the African National Con-
gress, etc.

Sec. 103. Policy toward the victims of apartheid.

B-2

Sec. 104. Policy toward other countries in Southern
Africa.

Sec. 105. Policy toward “frontline” states.

Sec. 106. Policy toward a negotiated settlement.
Sec. 107. Policy toward international cooperation
on measures to end apartheid.

Sec. 108. Policy toward necklacing.

Sec. 109. United States Ambassador to meet with
Nelson Mandela.

Sec. 110. Policy toward the recruitment and train-
ing of black South Africans by United States
employers.

TITLE I] - MEASURES TO ASSIST VICTIMS
; OF APARTHEID

Sec. 201. Scholarships for the victims of apartheid.
Sec. 202. Human rights fund.

Sec. 203. Expanding participation in the South Afri-
can economy.

Sec. 204. Export-Import Bank of the United States.
Sec. 205. Labor practices of the United States Gov-
ernment in South Africa.

Sec. 206. Welfare and protection of the victims of
apartheid employed by the United States.

Sec. 207. Employment practices of United States
nationals in South Africa.

Sec. 208. Code of Conduct.

Sec. 209. Prohibition on assistance.

Sec. 210. Use of the African Emergency Reserve.
Sec. 211. Prohibition on assistance to any person or
group engaging in “necklacing”.

Sec. 212. Participation of South Africa in agri-
cultural export credit and promotion programs.

TITLE II] - MEASURES BY THE UNITED STATES
TO UNDERMINE APARTHEID

Sec. 301. Prohibition on the importation of
krugerrands.

B-3

Sec. 302. Prohibition on the importation of military
articles.

Sec. 303. Prohibition on the importation of products
from parastatal organizations.

Sec. 304. Prohibition on computer exports to South
Africa.

Sec. 305. Prohibition on loans to the Government of
South Africa.

Sec. 306. Prohibition on air transportation with
South Africa.

Sec. 307. Prohibitions on nuclear trade with South
Africa.

Sec. 308. Government of South Africa bank
accounts.

Sec. 309. Prohibition on importation of uranium
and coal from South Africa.

Sec. 310. Prohibition on new investment in South
Africa.

Sec. 311. Termination of certain provisions.

Sec. 312. Policy toward violence or terrorism.

Sec. 313. Termination of tax treaty and protocol.
Sec. 314. Prohibition on United States Government
procurement from South Africa.

Sec. 315. Prohibition on the promotion of United
States tourism in South Africa.

Sec. 316. Prohibition on United States Government
assistance to, investment in, or subsidy for trade
with, South Africa.

Sec. 317. Prohibition on sale or export of items on
Munition List.

Sec. 318. Munitions list sales, notification.

Sec. 319. Prohibition on importation of South Afri-
can agricultural products and food.

Sec. 320. Prohibition on importation of iron and
steel.

Sec. 321. Prohibition on exports of crude oil and
petroleum products.

Sec. 322. Prohibition on cooperation with the armed
forces of South Africa.

Sec. 323. Prohibition on sugar imports.

B-4

TITLE IV —- MULTILATERAL MEASURES
TO UNDERMINE APARTHEID

Sec. 401. Negotiating authority.

Sec. 402. Limitation on imports from other
countries.

Sec. 403. Private right of action.

TITLE V - FUTURE POLICY TOWARD SOUTH
AFRICA

Sec. 501. Additional measures.

Sec. 502. Lifting of prohibitions.

Sec. 503. Study of health conditions in the “home-
lands” areas of South Africa.

Sec. 504. Reports on South Africa imports.

Sec. 505. Study and report on the economy of
southern Africa.

Sec. 506. Report on relations between other indus-
trialized democracies and South Africa.

Sec. 507. Study and report on-deposit accounts of
South African nationals in United States banks.
Sec. 508. Study and report on the violation of the
international embargo on sale and export of military
articles to South Africa.

Sec. 509. Report on Communist activities in South
Africa.

Sec. 510. Prohibition on the importation of Soviet
gold coins.

Sec. 511. Economic support for disadvantaged
South Africans.

Sec. 512. Report on the African National Congress.

TITLE VI - ENFORCEMENT AND ADMINISTRA-
TIVE PROVISIONS

Sec. 601. Regulatory authority.

Sec. 602. Congressional priority procedures.
Sec. 603. Enforcement and penalties.

Sec. 604. Applicability to evasions of Act.

am ™ Section 3 of the Ordinance further stipu-
lates that divestiture shall occur within the two-year
period. That period began to run on January 1, 1987. See
§ 2(b). Section 2(d) empowers a Board of Trustees to
suspend divestiture during this two-year period, pro-
vided that, before acting, the Board adopts a resolution.
Under § 2(e), the Board, in adopting such a resolution,
must find:

“(1) That the rate of return on the funds [is]
substantially lower than the average of the
annual earnings on the funds over the past five
years, and

(2) That continued divestiture under this ordi-
nance will be inconsistent with generally
accepted investment standards for conservators
of pension funds notwithstanding the intent of
this ordinance, or

(3) That divestiture under the divestiture pro-
gram will cause financial losses to the funds.”

Finally, in § 2(f), the Ordinance specifies that, when
adopting a suspension resolution, a Board must state in
writing its standards and conclusions, and set forth the
duration of the suspension; the period of suspension,

5 Similarly, § 1(iii), which is not expressly challenged in
this case, provides that entities doing business in or with
Namibia “shall be identified through correspondence with the
United Nations Office of the Commissioner for Namibia and
the United Nations Center for Transnational Corporations.”

D-5

however, may not exceed 90 days, and the two-year time
period for divestiture is tolled during the suspension.

Apparently because Ordinance No. 765 by its terms
applies only to the E.R.S. and the F. & P., it was unclear
whether the E.O.S. was also required to divest. As a
result, the City Council passed and the Mayor signed
Ordinance No. 792, which amended Baltimore City Code
(1976, 1983 Repl. Vol., 1986 Cum. Supp.), Art. 22, § 23(b),
to provide expressly that the City’s divestiture program
applies to the E.O.S.°

As of November 1987, the two-year period for dives-
titure had not begun to run for the F. & P. and the E.R.S.
For each quarter since the Ordinances’ effective date, the
Trustees of those systems have found, among other
things, that the “rate of return on the funds [has been]

¢ The Divestiture Ordinances represent the culmination of
several years of legislative effort. In 1983 the City Council
considered, but rejected, Bill No. 1608, which, like Ordinance
No. 765, called for divestiture over a flexible, two-year time
period. On September 23, 1985, the City Council, unanimously
adopted Resolution No. 42, which stated the City’s intention
immediately to proceed with the process of disinvestment. In
addition, this Resolution called upon the Boards of Trustees of
the City’s Retirement Systems to submit an investment pro-
posal designed to encourage businesses in which the City’s
pension funds were invested to improve conditions for their
nonwhite employees in South Africa and to take other steps in
opposition to apartheid. In response, on November 21, 1985,
the Trustees adopted a resolution generally calling only for a
ban on new investment in businesses that did not abide with
the Sullivan Principles, a code of fair employment practices for
businesses operating in South Africa. The Divestiture Ordi-
nances resulted in part from the perceived inadequacy of the
Trustees’ November 21 resolution.

D-6

substantially lower than the average of the annual earn-
ings on the funds over the past five years.” Thus, as for
those systems, the divestiture program has been sus-
pended for successive 90-day periods.

On December 31, 1986, the Trustees of each of the
City’s three employee pension systems, and two
employee beneficiaries, filed this action against the
Mayor and City Council of Baltimore, asking the Circuit
Court for Baltimore City to declare the Ordinances
invalid. In support of this request, the Trustees con-
tended: that § (1)(ii) of Ordinance No. 765 impermissibly
delegates legislative power to the Africa Fund, a private
entity; that the Ordinances unconstitutionally impair the
obligation of the City’s pension contracts with the sys-
‘tems’ beneficiaries; that the federal Comprehensive Anti-
Apartheid Act of 1986, Pub. L. No. 99-440, 100 Stat. 1086
(1986), preempts the Ordinances; that the Ordinances
intrude on the federal government's exclusive power to
conduct foreign policy; and that the Ordinances violate
the Commerce Clause of the United States Constitution,
Art. I, § 8, cl. 3. On January 9, 1987, four pension fund
beneficiaries, raising related arguments, moved to inter-
vene on the side of the Trustees.”

? In the three count complaint, the applicants for interven-
tion argued that the Ordinances intruded on the federal gov-
ernment’s exclusive foreign policy power, violated the
Commerce Clause, and violated the beneficiaries’ property
rights “under the ‘taking’ clause of the Fifth and Fourteenth
Amendments.”

= _—

D-7

The Trustees moved for summary judgment.’ After
hearing argument on March 26, 1987, the circuit court
denied the motion for summary judgment, finding it
necessary first to determine facts concerning the Ordi-
nances’ financial impact. On April 6, 1987, the circuit
court denied the motion to intervene.?

During the trial, which took place between June 22
and July 10, 1987, the parties presented a large amount of
highly technical evidence concerning the Ordinances’
financial impact. Thereafter the circuit court filed an
opinion and a declaratory judgment containing numerous
findings and conclusions. The circuit court, based on the
evidence of financial impact, held that “it cannot be con-
cluded that the Ordinance[s] will impair the performance
of the equity funds.”?° In reaching this decision, the trial

8 The applicants for intervention also filed a “proposed”
motion for summary judgment. The Court stated that it would
treat this motion and the supporting memoranda as an amicus
brief if intervention were denied. .

% In reaching this decision, the court first held that the
applicants did not have “an unconditional right to intervene as
a matter of law” under Maryland Rule 2-214(a)(1), since, under
a contrary ruling, “every pensioner or prospective pensioner of
the City retirement systems (a staggering multitude) would
have to be made parties. . . .” The court then found no basis for
intervention as of right under Rule 2-214(a)(2), concluding that
the Trustees adequately represented the applicants’ interest.
Finally, the court denied permissive intervention under Rule
2-214(b), noting that additional counsel would cause delay and
that the applicants could adequately present their views in an
amicus brief.

'© The parties had agreed that the Ordinances would not
affect the funds’ fixed income investments.

D-8

judge discounted the parties’ evidence detailing the per-
formance of other South Africa free (S.A.F.) equity funds:

“Some have fared better than the unrestricted
equity funds of the same money manager; some
fared worse. Many did better than the [Standard
& Poor 500 Index].!! All the experts agreed,
however, that the track records of these SAF
funds is too short (less than three years) to be
statistically significant.”

Moreover, the court noted that “not one witness was able
to express the opinion that the percentage return on the
plaintiffs’ equity investment will be reduced because of
the Divestment Ordinance[s].”

The circuit court indicated that the Ordinances
barred investments in 120 of the 500 companies on the
Standard & Poor 500 (S & P 500). The court further
recognized that these companies represent approximately
40% of the market capitalization of the S. & P. 500.12 Thus,
the court found that, under the Ordinances, the pension
systems’ portfolio will have more investments in rela-
tively smaller companies whose stock prices tend to be
more volatile. The court stated, however, that this was

11 The Standard & Poor 500, an index of approximately 500
stocks representing a cross-section of various sectors of the
economy, is designed to reflect the movement of the market as
a whole.

12 A corporation’s market capitalization is equal to the
number of shares outstanding multiplied by the price per
share. The market capitalization of the S. & P. 500 is, therefore,
the combined market capitalization of all corporations listed
on that index.

AS Na a

‘ae

a a eh BGR ten,

D-9

not necessarily a disadvantage, reasoning that in the long
run such stocks perform as well or better than larger
companies’ stocks.

The Trustees had attempted to show that the Ordi-
nances would adversely affect their money managers’
“active” style, which had proved very successful. Gener-
ally, this style emphasizes investments in certain sectors
of the economy in an attempt to surpass rather than
merely to duplicate the market’s performance.!? The cir-
cuit court found that, by eliminating some potential
investments in certain sectors, the Ordimances would
affect the active style. Nonetheless, the court deemed any
interference to be insignificant, concluding that “ade-
quate SAF [South Africa free] replacement stocks can be
found for each sector, even though the SAF companies
will be replacing larger companies.”

The Trustees had also introduced evidence purport-
ing to show that the Ordinances would diminish the
quality of the pension systems’ portfolio by requiring
money managers to forego their “first choice.” The circuit
court disagreed, stating that “it is not axiomatic that the
manager’s second choice is inferior to the first.” The
court explained that money managers ordinarily invest in
a limited number of companies with which they are
familiar.'4 Thus, the court found that the Ordinances

13 Other forms of active management emphasize the appli-
cation of certain criteria in the selection of individual stocks.
Such criteria include yield and the ratio of price to book-value.

14 According to the Trustees, a money manager typically
holds positions in from 40 to 60 companies. By contrast, the
record shows that approximately 5,000 stocks are publicly
traded.

D-10

would merely require money managers to do additional
research in order to locate adequate replacement stocks.

The court did find that the Ordinances would affect
the Short Term Investment Fund (S.T.I.F.). The S.T.1-F. is a
fund of very short-term investment paper that is pooled
in a local bank with the funds of other owners and is
issued to meet immediate or short-term liquidity require-
ments. The Ordinances affect participation in the pooled
S.T.I.F., since that fund invests in companies doing busi-
ness in South Africa. As comparable substitutes may not
be readily available, the pension systems’ S.T.I.F. may be
forced to increase its ratio of investments in lower-yield-
ing obligations, such as Treasury Bills. Moreover, unlike
the pooled S.T.I.F, most South Africa free S.T.I.F.s charge
management fees. These two factors, the circuit court
found, would result in a decreased annual return on the
pension systems’ S.T.I.F. of .75% or $900,000.

The court also found that the Ordinances require
divestiture of 47% of the pension funds’ equity portfolio
and 10% of the fixed income portfolio. The parties agreed
that replacing these holdings with S.A.F. investments
would lead to some initial, one-time costs; however, they
disagreed as to the extent of the costs.15 The Trustees had
attempted to prove that, in addition to “explicit” costs
(such as broker’s fees or commissions), transactions of
this magnitude adversely affect stock prices and thereby
result in additional, “implicit costs. Noting that other
experts reject this theory, the circuit court declined to

15 The Trustees’ expert placed this figure at between $4.4
million and $5.5 million. According to the City’s expert, the
figure was only $540,000.

D-11

credit the Trustees’ evidence. In addition, the court
accepted the City’s contention that the cost of transac-
tions that would have occurred absent divestiture should
be subtracted from the total costs of divestiture. Conse-
quently, the court fixed the initial cost of divesting the
funds’ equity and fixed income portfolios at $750,000.16

Finally, the court observed that, because of the
smaller size of S.A.F. companies, divestiture will result in
a larger volume of trading. This in turn, the court found
will cause an annual increase in broker’s commissions of
$300,000.

In summary, the trial court fixed the initial cost of
divestiture at $750,000, or one-sixteenth of 1% of the
funds’ total value. In addition, the court calculated that
the ongoing cost of divestiture is $1.2 million per year
($900,000 for the S.T.I.F. and $300,000 for additional com-
missions), or one-tenth of 1% of the funds’ total value.
The court reasoned further: “If the Pension Funds earn in
excess of 10% (as has regularly been the case since 1984),
the loss to the retirees is halved, since the City takes one-
half of the excess earnings.” Consequently, the court con-
cluded that the initial cost to the systems’ beneficiaries is
actually only '/32 of 1% and that the ongoing cost is
actually only 1/2 of 1%.!7

16 Of this sum, the court found that $500,0000 was attribu-
table to divestment of the equity portfolio and $250,000 was
attributable to divestment of the fixed income portfolio.

17 Specifically, the trial judge found that “nothing in the
evidence suggests that the Ordinance[s] will in any way

(Continued on following page)

D-12

In light of the Ordinances’ “minimal” effect and the
“salutary moral principle” underlying them, the circuit
court rejected the Trustee’ impairment of contract
argument. ;

The court upheld § 1(ii) of Ordinance 765, which
provides that entities doing business in South Africa shall
be identified by reference to the Africa Fund’s “Unified
List.” The circuit court construed the ordinance to mean
that “[t]he Unified List is merely a ‘reference,’ which the
Trustees may accept or reject,” and that the “the Trustees
are the final authority to determine whether a company is
disqualified.” Accordingly, the court held that § 1(ii) did
not impermissibly delegate legislative power to a private
entity. The trial judge also rejected the Trustees’ other
challenges to the Ordinances.18

(Continued from previous page)

jeopardize the amount or payment of defined benefits.” He
further found that, even assuming the existence of a contrac-
tual right to variable benefits, “the extent of the impairment is
without legal significance.” As noted previously, supra n.3,
variable benefits that have already accrued but are payable in
the future are funded by guaranteed investment contracts pur-
chased from insurance companies. Thus, the Ordinances have
no effect on these benefits.

18 Additionally, in a number of interpretive rulings, the
circuit court held: (1) that the power to suspend the divestiture
program permits new investment, during the period of suspen-
sion, in companies doing business in South Africa; (2) that the
two-year time period for divestiture must be extended for a
further time equal to the length of any valid period of suspen-
sion; (3) that the Ordinances do not limit the number of times

(Continued on following page)

D-13

The Trustees and the applicants for intervention both
appealed to the Court of Special Appeals. On the parties’
joint request, we issued a writ of certiorari to consider the
important issues presented.

I.

Initially, we shall address the denial of the motion by
four pension fund beneficiaries to intervene on the side
of the Trustees. In denying the motion, the circuit court
ruled that the applicants were not entitled to intervene as
a matter of right under Maryland Rule 2-214(a)(1) or (2),
and ruled that they would not be granted permissive
intervention under Rule 2-214(b).

We disagree that the applicants were not entitled to
intervene as a matter of right under Rule 2-214(a)(2). Rule
2-214(a)(2) provides in pertinent part:

“Upon timely motion, a person shall be permit-
ted to intervene in an action: . . . (2) when the
person claims an interest relating to the prop-
erty or transaction that is the subject of the
action, and the person is so situated that the
disposition of the action may as a practical mat-
ter impair or impede the ability to protect that

(Continued from previous page)
that the Trustees can suspend divestiture; and (4) that the

Trustees can order suspension at any time before the time limit
has run, even if total divestiture has already occurred.

None of the parties has challenged these interpretative
rulings.

D-14

interest unless it is adequately represented by
existing parties.”

Plainly the applicants, as beneficiaries, “claifm] an
interest relating to the property . . . that is the subject of
the action.” Moreover, a ruling upholding the Ordi-
nances’ validity would be res judicata in a separate action
by the applicants. Restatement (Second) of Judgments,
§ 41(1)(a) (1982). See Ugast v. LaFontaine, 189 Md. 227, 233,
55 A.2d 705 (1947) (judgment for constructive trustee was
res judicata in subsequent action brought by beneficiaries
of constructive trust). See also Sea-Land Services, Inc. v.
Gaudet, 414 U.S. 573, 593-594, 94 S.Ct. 806, 819, 39 L.Ed.2d
9 (1974). Consequently, the applicants are “so situated
that the disposition of the action may as a practical mat-
ter impair or impede” their ability to protect their inter-
ests.!9 Indeed, the trial court in its opinion did not find
otherwise.

The basis for the trial court’s denial of intervention as
of right was the court’s conclusion that the Trustees ade-
quately represent the applicant’s interests.

In Citizens Coordinating Comm. v. TKU, 276 Md. 705,
713, 351 A.2d 133 (1976), we pointed out that under the
intervention of right provision of former Rule 208, the
rule requires only that the representation by existing

19 We caution that, to show that the disposition of an
action may as a practical matter impair or impede his ability to
protect his interest, an applicant need merely show that he
might be disadvantaged by the disposition of the action in
which he sought to intervene; he need not make the additional
showing that the disposition of that action would be res judi-
cata as to him. See Citizens Coordinating Comm. v. TKU, 276
Md. 705, 711-712, 351 A.2d 133 (1976).

NN

D-15

parties “may be inadequate.” In Maryland Radiological v.
Health Serv., 285 Md. 383, 402 A.2d 907 (1979), which was
also decided under former Rule 208, we adopted an
“interest analysis” test to determine whether existing rep-
resentation is adequate. Referring to the discussion in 7A
C. Wright & A. Miller, Federal Practice and Procedure § 1909
(1972), Judge Digges for the Court explained that test as
follows (285 Md. at 390-391, 402 A.2d at 911-912):

“First, these authors suggest the obvious: If the
potential newcomer’s interest is not represented
or advocated to any degree by an existing party,
or if the existing parties all have interests that
are adverse to those of the proposed intervenor,
he is unrepresented and, assuming compliance
with the other provisions of Rule 208 a, inter-
vention should be permitted. . . . Second, if the
applicant’s interest is similar but not identical to
that of an existing party, ‘a discriminating judg-
ment is required on the circumstances of the
particular case, but he ordinarily should be
allowed to intervene unless it is clear that the
party will provide adequate representation for
the absentee.’ Id. (footnote omitted). Third, if the
interest of an existing party and an intervenor-
applicant are identical, or if an existing party is
charged by law with representing a movant’s
interest, ‘a compelling showing should be
required to demonstrate why this representation
is not adequate.’ ”

Also, in both the TKU case, 276 Md. at 712, 351 A.2d at
138, and the Maryland Radiological case, 285 Md. at 388 n.
5, 402 A.2d at 910 n. 5, we pointed out that intervention
decisions under Rule 24 of the Federal Rules of Civil

Procedure serve as a guide to interpreting the Maryland
Rule.

D-16

Because of his fiduciary duties to the Trust’s benefici-
aries, a trustee is charged by law with representing the
beneficiaries’ interests. Consequently, in cases under Rule
24, F.R. Civ. P., courts often view the interests of a trustee
and the beneficiaries as the same, conclude that the
trustee will adequately represent the beneficiary’s inter-
ests, and deny to the beneficiaries intervention as of
right. See, e.g., Heyman v. Exchange Nat. Bank of Chicago,
615 F2d 1190, 1194 (7th Cir. 1980); Peterson v. United
States, 41 F.R.D. 131, 133-134 (D.Minn. 1966); Kind v. Mark-
ham, 7 F.R.D. 265, 266 (S.D.N.Y 1945). The cases recognize,
however, that where there is a conflict between the inter-
ests of the trustee and beneficiaries, or when other cir-
cumstances exist whereby the representation by the
trustee may be inadequate, the beneficiaries will be
granted intervention. See e.g., Swift v. Swift, 61 F.R.D. 595,
597-598 (E.D.N.Y. 1973); Peterson v. United States, supra, 41
F.R.D. at 134; Federal Home Loan Bank v. Long Beach Fed. S.
& L. Ass'n, 122 FSupp. 401, 435 (S.D. Cal. 1954).

The trustees of a public pension system do not neces-
sarily occupy precisely the same position as the trustees
of a conventional private trust. It is true that, like ordi-
nary trustees, the persons administering Baltimore’s
retirement funds are charged with fiduciary duties of
loyalty and care toward the systems’ beneficiaries. In the
present case, however, the Trustees have obligations to
the City as well. As to variable benefits, which are the
only benefits affected by the Ordinances, Baltimore City
receives one-half of the systems’ excess earnings over
10%. Thus, with respect to these benefits, the City is a co-
beneficiary. Moreover, in this case the Boards of Trustees
are agencies of Baltimore City, which is the party oppo-
nent in this litigation. The Trustees are municipal officials

D-17

with some responsibility to comply with the City’s direc-
tives. In essence, the Trustees are prosecuting this lawsuit
against their employer. The present case, therefore, is
very different from an ordinary action brought on behalf
of beneficiaries. In fact, it should be noted in this context
that, during Baltimore’s last mayoral election campaign,
one of the issues between the candidates concerned the
propriety of permitting the Trustees to prosecute an
appeal in the present case. See The Sun (Baltimore),
August 29, 1987, at 5A.

In light of the Trustees’ peculiar role, we conclude
that the beneficiaries’ interests are “similar but not identi-
cal” to those of the Trustees. See Maryland Radiological v.
Health Serv., supra, 285 Md. at 390, 402 A.2d at 912. In our
opinion it is not sufficiently clear, under the facts of the
present case, that the Trustees will adequately represent
the applicants. The prospect that the Trustees might not
ask the United States Supreme Court to review an unfa-
vorable ruling in this Court is not entirely unlikely in
light of past events. A decision not to seek Supreme
Court review would adversely affect the applicants, who
would be bound by our ruling.

Consequently, under these circumstances, we hold
that the Trustees may not adequately represent the appli-
cants’ interests. Thus, the trial court erred in holding that
the applicants were not entitled to intervene as a matter
of right under Rule 2-214(a)(2).?°

20 We are not persuaded that, because two beneficiaries
have been named as co-plaintiffs, that interests of other

(Continued on following page)

D-18

When a trial court has erroneously denied a motion
to intervene, the ordinary remedy is to reverse and
remand the case so that the intervenor may present the
evidence that he originally would have produced. See e.g.,
Citizens Coordinating Comm. v. TKU, supra, 276 Md. at 714,
351 A.2d at 139. In the case at bar, however, the appli-
cants took the position, during oral argument before us,
that they do not desire a remand for this purpose. Rather,
they only wish to have the status of parties in the present
proceeding before this Court and for all future proceed-
ings in the case, including the right to seek review in the
United States Supreme Court. As a consequence, the cir-
cuit court’s error does not require reversal. Instead, we
shall exercise our authority under Rule 8-604(e) to modify
the circuit court’s judgment so as to grant the applicants’
motion to intervene.

II.

Section 1(ii) of Ordinance 765 provides that “[b]usi-
ness entities doing business in or with the Republic of
South Africa shall be identified by reference to the most
recent annual report of the Africa Fund entitled ‘Unified
List of United States Companies With Investments or
Loans in South Africa and Namibia.’” The Trustees

(Continued from previous page)

beneficiaries are adequately represented. As the applicants
point out (Brief at 52), “the prosecution and appeal of this
action is being maintained under the authority and direction of
the Trustees.” It appears that the Trustees alone direct the
conduct of the case and that the presence of the two benefici-
aries as co-plaintiffs is largely nominal.

a ~

D-19

contend that this provision constitutes an impermissible
delegation of legislative power to a private entity.

The City agrees that if the Trustees are bound by the
South Africa Fund Unified List, and with respect to
Namibia bound by the determinations of the United
Nations’ offices referred to in the Ordinances, then the
Ordinances are unconstitutional (City’s Brief, p. 31). The
City, however, urges that the language of the Ordinances
is ambiguous, and it points to the circuit court’s construc-
tion of the Ordinance No. 765 which was as follows:

“the directive in the Ordinance that [corpora-
tions doing business in or with South Africa}
‘shall be identified by reference to the most
recent annual report’ of the Africa Fund Unified
List is merely a ‘reference,’ which the Trustees
may accept or reject.”23

Under the circuit court’s construction, the City’s argu-
ment continues, there is clearly no impermissible delega-
tion of legislative power

As the Court stated in Comm’n on Med. Discipline v.
Stillman, 291 Md. 390, 413, 435 A.2d 747, 759 (1981), “[iJn
the enactment of laws, the legislature acts in the exercise
of a power conferred upon it by the people; it cannot
validly redelegate its lawmaking authority to others.” See
Md. Co-op. Milk Producers v. Miller, 170 Md. 81, 88, 182 A.
432, 435 (1935); Brawner v. Supervisors, 141 Md. 586,
595-596, 119 A.250 (1922); Bradshaw v. Lankford, 73 Md.
428, 430, 21 A. 66 (1891); Fell v. State, 42 Md. 71, 83 (1875);

21 The circuit court, went on to point out that the Unified
List itself stated that “this list should be used as a starting
point for further investigation.”

D-20

Hammond v. Haines, 25 Md. 541, 562 (1866). See also Anne
Arundel County v. Fraternal Order, 313 Md. 98, 111,
114-115, 543 A.2d 841 (1988); Maryland Cl. Emp Ass‘n v.
Anderson, 281 Md. 496, 508-509, 380 A.2d 1032, 1039
(1977). This principle follows from the nature of represen-
tative democracy. Pursuant to Article XI-A of the Mary-
land Constitution, and as authorized by Maryland Code
(1957, 1987 Repl. Vol.), Art. 25A, the Baltimore City Coun-
cil has the sole power to enact local legislation for the
people of Baltimore City. Cheeks v. Cedlair Corp., 287 Md.
595, 608-609, 415 A.2d 155 (1980).22 Thus, in enacting
legislation, City Council members generally have no
authority to substitute the judgment of others for their
own judgment. Md. Co-op Milk Producers v. Miller , supra,
170 Md. at 88, 182 A. at 435; Bradshaw v. Lankford, supra,
73 Md. at 430, 21 A. at 66.

The principle of nondelegation however, is not aDso-
lute See Bradshaw v. Lankford, supra, 73 Md. at 430, 21 A. at
66. As this Court stated in Department of Transportation v.
Armacost, 311 Md. 64, 72, 532 A.2d 1056, 1060 (1987),
“{oJur cases have long sanctioned delegations of legisla-
tive power to administrative officials where sufficient
safeguards are legislatively provided for the guidance of
the agency in its administration of the statute.” Further-
more, the Court noted in Price v. Clawns, 180 Md. 532, 538,
25 A.2d 672, 675 (1942), that “[t]here are many instances
in which authority is lodged in and permitted to private

22 See also;-e-g., Maryland State Administrative Board of
Election Law, v. Talbot County, 316 Md. 332, 344-345, 558 A.2d
724 (1989); Griffith v. Wakefield, 298 Md. 381, 386, 388, 470
A.2d 345 (1984).

D-21

persons by the Legislature.” See, Portsmouth Stove and
Range Company v. Mayor and City Council of Baltimore, 156
Md. 244, 251-253, 144 A. 357, 360-361 (1929). Nonetheless,
delegations of legislative authority to private entities are
strictly scrutinized because, unlike governmental officials
or agencies, private persons will often be wholly unac-
countable to the general public. See Group Health Ins. of
N.J. v. Howell, 40 N.J. 436, 445, 193 A.2d 103 (1963); Fink v.
Cole, 302 N.Y. 216, 224, 97 N.E.2d 873 (1951); Union Trust
Co. v. Simmons, 116 Utah 422, 427-428, 211 P.2d 190 (1949);
Note, The State Courts and Delegation of Authority to Private
Groups, 67 Harv. L. Rev. 1398, 1402 (1954).?3

A number of cases have held that no impermissible
delegation takes place when a legislature merely adopts a
fixed standard promulgated by a private entity. See, e.g.,
St. Louis, Iron Mt. & Southern Railway Co. v. Taylor, 210
U.S. 281, 28 S.Ct. 616, 52 L.Ed. 1061 (1908); Kingery v.
Chapple, 504 P.2d 831, 836 n. 13 (Alaska 1972); City of
Bakersfield v. Miller, 64 Cal.2d 93, 97-98, 48 Cal. Rptr. 889,
410 P.2d 393, cert. denied, 384 U.S. 988, 86 S.Ct. 1890, 16
L.Ed.2d 1005 (1966); City of Warren v. State Const. Code

23 For example, in Fink v. Cole, supra, the New York legis-
lature had vested the Jockey Club, a private corporation, with
broad discretion to license owners, trainers, and jockeys at
horse races in that state. The Court of Appeals of New York
noted that the issuance of licenses is “essentially a sovereign
power” and that the stewards of the Jockey Club, who wielded
that power under the law, were “neither chosen by, nor respon-
sible to the State government,” 302 N.Y. at 224, 97 N.E.2d at
876. Consequently, the court held that the delegation of licens-
ing power to the Jockey Club was “such an abdication as to be
patently an unconstitutional relinquishment of legislative
power... .” 302 N.Y. at 225, 97 N.E.2d at 876.

D-22

Com’'n, 66 Mich. App. 493, 239 N.W.2d 640 (1976); People v.
Shore Realty, 127 Misc.2d 419, 486 N.Y.S.2d 124 (1984);
Meyer v. Lord, 37 Or. App. 59, 586 P.2d 367, 371 (1978);
Dudding v. Automatic Gas Co., 193 S.W.2d 517, 520 (Texas
1946). But cf. Cawley v. Northern Waste Co., 132 N.E. 365
(Mass. 1921).

The Ordinance in the present case, however, does not
incorporate a fixed standard but a standard that is subject
to periodic revision by the Africa Fund. Section 1(ii) of
Ordinance No. 765 requires the Trustees to employ the
“most recent annual report” of the Africa Fund’s Unified
List. Courts have frequently viewed the legislative incor-
poration of future changes or revisions in a standard
promulgated by a private entity as an impermissible dele-
gation of authority. See, e.g., City of Tucson v. Stewart, 45
Ariz. 36, 40 P.2d 72, 80-81 (1935); Agnew v. City of Culver
City, 147 Cal.App.2d 144, 153-157, 304 P.2d 788, 795-797
(1956); People v. Pollution Control Board, 83 Ill.App.3d 802,
38 Ill. Dec. 928, 404 N.E.2d 352 (1980); Gumbhir v. Kansas
St. Bd. of Pharmacy, 228 Kan. 579, 618 P.2d 837, 843 (1980);
State v. Crawford, 104 Kan. 141, 177 P. 360 (1919); Coffman
v. State Board of Examiners in Optometry, 331 Mich. 582, 50
N.W.2d 322, 326 (1951); People v. Mobil Oil Corp., 101
Misc.2d 882, 422 N.Y.S.2d 589, 592 (1979); State v. Emery,
55 Ohio St. 364, 370, 45 N.E. 319 (1896); Hillman v. North-
ern Wasco County People’s Util. Dist., 213 Or. 264, 323 P.2d
664, 674-675 (1958), overruled on other grounds in Maulding
v. Clackamas County, 278 Or. 359, 563 P.2d 731 (1977);

se a liana ie hi” Ste

sae iy i A Wet es

A ie ce dann Uae acl diy Tee bl i mahal abl

D-23

Woodson v. State, 95 Wash.2d 257, 623 P.2d 683, 685
(1980).24

On the other hand, courts have sometimes upheld
legislative adoption of private organizations’ standards
which are periodically subject to revision, in limited cir-
cumstances such as where the standards are issued by a
well-recognized, independent authority, and provide
guidance on technical and complex matters within the
entity’s area of expertise. See, e.g., Ex Parte Gerino, 143
Cal. 412, 419, 77 P. 166 (1904); Colorado Polytechnic College
v. State Board for Community Colleges and Occupational
Education, 476 P.2d 38, 42 (Colo. 1970); Rosenthal v. State
Bar Examining Committee, 116 Conn. 409, 165 A. 211, 214
(1933); State v. Dee, 77 So.2d 768 (Fla. 1955); Lucas v. Maine
Com'n of Pharmacy, 472 A.2d 904 (Me. 1984); Application of
Hansen, 275 N.W.2d 790, 796-797 (Minn. 1978), appeal dis-
missed, 441 U.S. 938, 99 S.Ct. 2154, 60 L.Ed.2d 1040 (1979);
Appeal of Murphy, 482 Pa. 43, 393 A.2d 369 (1978), appeal

24 The principle set forth in these cases does not apply to a
delegation of a legislative power to another governmental entity.
In our complex system of government, state and local as well
as state and federal authority unavoidably intermesh. See, e.g.,
Department of Transportation v. Armacost, 311 Md. 64, 82-83,
532 A.2d 1056 (1987) (to maintain eligibility for federal funds,
General Assembly conformed state law to requirements of
federal Clean Air Act); Price v. Clawns, 180 Md. 532, 538, 25
A.2d 672 (1942) (statute making it a crime to ride railroad
except in compliance with railroad’s regulations dovetailed
with federal statutes dictating substance of railroad’s regula-
tions). As a result, a legislature may ordinarily adopt a stan-
dard promulgated by another governmental entity, even if that
standard is subject to modification by the other governmental
entity.

D-24

dismissed, 440 U.S. 901, 99 S.Ct. 1204, 59 L.Ed.2d 449
(1979); State v. Wakeen, 263 Wis. 401, 407-412, 57 N.W.2d
364, 367-369 (1953); Potter v. New Jersey Supreme Court, 403
F. Supp. 1036, 1040 (D. N.J. 1975), aff'd, 546 F.2d 418 (3rd
Cir. 1976). These cases usually involve accreditation or
similar programs by established professional
organizations.?>

We need not in the present case express agreement or
disagreement with the specific holding in any of the
above-cited opinions of our sister states concerning dele-
gation to private entities. It is sufficient to point out, in
light of the prior decisions of this Court and the cases
generally throughout the country, that if the Trustees are
bound by the determinations of the private entities listed

25 In People v. Pollution Control Board, 83 Ill.App.3d 802,
38 Ill. Dec. 928, 404 N.E.2d 352 (1980), the court held invalid a
statutory provision exempting from a noise control ordinance
auto racing events sanctioned by, among others, a private
group called the Association of Motor Sports. The court
deemed the provision an improper delegation. In doing so, the
court distinguished cases holding that bar applicants must
graduate from American Bar Association-approved law
schools (404 N.E.2d at 357-358):

“[T]he State’s interest in assuring qualified legal
practitioners was commensurate with the A.B.A.’s
interest in maintaining high standards among law
schools.

» » *

“The corporate purpose of the Association of Motor
Sports is unrelated to the legislature’s presumed
intent [in enacting the exemption from the noise
ordinance]. Therefore, we are not persuaded by the
analogy to the ABA’s law school approval process.”

D-25

in the Ordinances, there arises a serious question con-
cerning the validity of the Ordinances under Article XI-A
of the Maryland Constitution.

—

It is a settled “principle that a court will, whenever
reasonably possible, construe and apply a statute to avoid
casting serious doubt upon its constitutionality.” Yang-
ming Transport v. Revor Products, 311 Md. 496, 509, 536,
A.2d 633 (1988). See, e.g., Craig v. State, See
___ A.2d ___ (1978); Heileman Brewing v. Stroh Brewery, 308
Md. 746, 763-764, 521 A.2d 1225 (1987); In re Criminal
Investigation No. 1-162, 307 Md. 674, 685, 516 A.2d 976,
982 (1986); Davis v. State, 294 Md. 370, 377, 451 A.2d 107,
111 (1982). We agree with the circuit court and the City
that this principle is fully applicable to the Ordinances.
As Judge Greenfeld pointed out for the court below, the
language of the Ordinances, designating the South Africa
Fund’s Unified List as a “reference,” is reasonably subject
to the construction that the Trustees are not bound by the
list. It is, in the words of the circuit court, “merely a
‘reference’ which the Trustees may accept or reject.”

The circuit court’s construction of the Ordinances,
which we uphold, avoids casting substantial doubt upon
their validity under the cases dealing with delegation of
legislative power to private entities. The Trustees have
cited no case, and we are aware of none, indicating that it
is an impermissible delegation of legislative authority for
a legislative body to direct a government agency to use a
private entity’s list merely as an advisory reference, with
the agency being free to decline to follow the list.

Consequently, it is for Trustees to determine whether
a particular company is doing business in South Africa.

D-26

While the view of the South Africa Fund must be taken
into consideration, the Trustees may reject that view with
regard to any particular company.

The concept of “doing business” in a particular area
involves a matter of degree. If viewed expansively,
“doing business” would encompass even the most tan-
gential contacts with South African entities. On the other
hand, if construed very narrowly, “doing business” might
signify only actual ownership or control of productive
assets, such as mines or factories, in South Africa. Clearly,
however, the City Council did not contemplate a defini-
tion so narrow as to frustrate the objectives of divestiture.
Nevertheless, from the Ordinances’ references to the
Africa’s Fund’s and United Nations organizations’ defini-
tions, it is clear that the City Council sought a responsible
standard, and did not wish to bar investments in firms
“doing business” under the most expansive sense of that
term. In other contexts, we have construed the statutory
phrase “doing business” in a geographical area to mean
doing a “substantial amount of business” or engaging “in
significant business activity” in that area. See, e.g., Yangm-
ing Transport v. Revon Products, supra, 311 Md. at 504-509,
536 A.2d at 637-640; S.A.S. Personnel Consult v. Pat-Pan,
286 Md. 335, 339-340, 407 A.2d 1139, 1142 (1979); G.E.M.,
Inc. v. Plough, Inc., 228 Md. 484, 488-489, 180 A.2d 478, 481
(1962). In our view, this is the definition which the
Trustees should utilize.

Il.

According to the Trustees and the beneficiaries, the
Ordinances impair the obligations of the beneficiaries’

oe tte Ag ign eee UIE

tein 6 eM aD ALS UNCP a ve aA ti ohn NY a te

ier bey ree es

D-27

pension contracts with the City, in violation of the Con-
tract Clause of the United States Constitution, Art. I, § 10.
We disagree.

A.

In Robert T. Foley Co. v. W.S.S.C., 283 Md. 140, 151-152, 389
A.2d 350, 357 (1978), we reviewed the framework for
determining if governmental action unconstitutionally
impairs contractual obligations, saying:

“Consideration of a claim that particular
governmental action invalidly impairs contrac-
tual obligations involves several steps. See
United States Trust Co. v. New Jersey, 431 U.S. 1,
17-21, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). First, it
must be determined whether a contract existed.
If that hurdle is successfully cleared by the
claimant, a court next must decide whether an
obligation under that contract was changed.
Finally, if the second question is answered in the
affirmative, the issue becomes whether the
change unconstitutionally impairs the contract
obligation, ‘[flor it is not every modification of a
contractual promise that impairs the obligation
of contract under federal law... .’ City of El Paso
v. Simmons, 379 U.S. 497, 506-507, 85 S.Ct. 577,
582-583, 13 L.Ed.2d 446 (1965).”

See State v. Good Samaritan Hospital, 299 Md. 310, 318, 473
A.2d 892, 896, appeal dismissed, 469 U.S. 802, 105 S.Ct. 56,
83 L.Ed.2d 7 (1984). See also State v. Burning Tree Club, Inc.,
315 Md. 254, 271, 554 A.2d 366 (1989); Chevy Chase Savings
& Loan v. State, 306 Md. 384, 416, 509 A.2d 670 (1986).

There is no doubt that, by establishing the pension
systems, the City imposed contractual obligations on

D-28

itself. Under Maryland law, pension plans create contrac-
tual duties toward persons with vested rights under the
plans. See, e.g. Archer v. Archer, 303 Md. 347, 357, 493 A.2d
1074 (1985); Lookingbill v. Lookingbill, 301 Md. 283, 289, 483
A.2d 1 (1984); Deering v. Deering, 292 Md. 115, 124-128,
437 A.2d 883 (1981); City of Frederick v. Quinn, 35 Md.App.
626, 371 A.2d 724 (1977). Moreover, the Baltimore City
Code expressly recognizes the existence of a contractual
relationship, at least between the City and the members
of the F. & P. and the E.R.S. Baltimore City Code (1976,
1983 Repl. Vol.), Art. 22, § 42.26

Since divestment does not alter the provisions in the
law concerning the amount of benefits that a retiree is
entitled to receive, the Ordinances do not directly change
the City’s pension contracts with the systems’ benefici-
aries. Compare Maryland State Teachers Ass'n v. Hughes, 594
F.Supp. 1353 (D. Md. 1984), aff'd, No. 84-2213 (4th Cir.
Dec. 5, 1985).

26 Section 17(e)(ii) provides, however, that, notwithstand-
ing § 42, any increase in variable benefits “shall not become an
obligation of the City of Baltimore.” As an alternate ground for
his decision, the trial judge held that, by virtue of these sec-
tions, the beneficiaries could claim no contractual right to
variable benefits. We disagree for two reasons. First, the above
disclaimer simply recognizes that future variable benefits
depend not on City contributions but on market performance.
Second, according to the City Council’s file memorandum on
the variable benefits ordinance, the disclaimer was also
designed to “protect the City from any liability if [the] Variable
Benefit Fund . . . does not have sufficient earnings to provide
for previously awarded benefits.”

D-29

The Trustees argue, however, that the Ordinances
indirectly change these contracts by modifying the man-
ner in which the pension funds are invested.

The right to receive defined benefits was not indi-
rectly changed. Judge Greenfeld expressly found that
‘nothing in the evidence suggests that the Ordinances
will in any way jeopardize the amount or payment” of
the defined benefits. That finding is supported by the
evidence and cannot be deemed clearly erroneous under
Rule 8-131(c).

The trial court did find that the initial and ongoing
costs of divestiture may affect the pension systems’ prof-
itability and, as a result, may slightly diminish the level
of future variable benefits.2”7 Thus, in this respect, the
Ordinances may indirectly change the City’s obligation
under its contracts with the beneficiaries. The cases, how-
ever, make it clear that an insubstantial change does not
unconstitutionally impair the obligations of a contract.
Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459
U.S. 400, 411, 103 S.Ct. 697, 704, 74 L.Ed.2d 569 (1983);
Allied Structural Steel Co. v. Spaunaus, 438 U.S. 234,
244-245, 98 S.Ct. 2716, 2722-2723, 57 L.Ed.2d 727 (1978);
Chevy Chase Savings & Loan v. State, supra, 306 Md. at 416,
509 A.2d at 686.

The circuit court found that the initial cost of divesti-
ture is one-thirty-second of 1% of the systems’ assets and
that the ongoing annual cost is one-twentieth of 1%.

27 As pointed out previously, the Ordinances have no
effect on accrued variable benefits, which are funded by guar-
anteed investment contracts.

D-30

Based on these findings, which are not clearly erroneous,
it follows that the circuit court was justified in concluding
that the cost of the Ordinances to the retirement systems,
and thus to the systems’ beneficiaries in terms of future
variable benefits, is so minimal that it does not approach
the constitutional standard for impairment.?®

B. -

The Trustees further argue that the Ordinances indi-
rectly change the pension contracts by disturbing the
beneficiaries’ expectations that benefits will be well
secured. According to the Trustees, the beneficiaries are
entitled to demand that the systems’ funds “will be
invested prudently for the exclusive benefit of the
workers (and their beneficiaries) and for the sole purpose
of securing the payment of promised future benefits.”
(Trustees’ Brief, pp. 14-15). Thus the Trustees contend
that the contracts incorporate the common-law duties of
prudence and loyalty and that the Ordinances alter those
duties.

We agree that the pension contracts incorporate the
Trustees’ common-law duties of prudence and loyalty.

28 It should be noted that the circuit court’s findings with
regard to the effects of divestment seem to be premised upon
divestment of holdings in all companies on the South Africa
Fund’s Unified List. At the same time, as discussed in Part II of
this opinion, the circuit court held, and we agree, that the
Trustees are not bound by the Unified List. Consequently,
depending upon the Trustees’ decisions concerning what com-
panies are doing business in South Africa, based on the stan-
dards set forth in Part II of this opinion, the costs of divestment
could be somewhat lower than found by the circuit court.

-_ ‘Wetted Rantala «vee

ae, fb belkes Wcthstt eel She ABC 2K! >

D-31

Moreover, we shall assume that if legislation substantially
alters those duties, the legislation should be viewed as
changing the obligations of contract. Nonetheless, in this
case, the Trustees have not proven such change.??

As stated above, one of the common-law fiduciary
duties is the requirement that trustees act prudently in
managing trust affairs. Shipley v. Crouse, 279 Md. 613, 621,
380 A.2d 97 (1977); Zimmerman v. Coblentz, 170 Md. 468,
484, 185 A. 342, 349 (1936); Johnson v. Webster, 168 Md.
568, 576, 179 A. 831, 834 (1935); Fox v. Harris, 141 Md. 495,
506, 119 A. 256, 260 (1922); Gilbert v. Kolb, 85 Md. 627,
634-636, 37 A. 423 (1897); Gray v. Lynch, 8 Gill 403, 431
(1849); Green v. Lombard, 28 Md.App. 1, 5, 343 A.2d 905,
909, cert. denied, 276 Md. 743 (1975). The Court in Shipley
v. Crouse, supra, 279 Md. at 621, 370 A.2d at 102 (quoting
G. Bogert, The Law of Trust and Trustees, § 541 (2d ed.
1960), explained as follows:

“‘A trustee is required to manifest in all his
management of the trust the care, skill, pru-
dence, and diligence of an ordinarily prudent
man engaged in similar business affairs and

29 There is very little case law with respect to whether
divestiture conflicts with a trustee’s duties to beneficiaries. In
Associated Students of the Univ. of Or. v. Oregon Inv. Council,
No. 78-7502 (Cir. Ct. Lane Co., Or. Jan. 21, 1985), rev’d 82
Or.App. 145, 728 P.2d 30 (1986), petition denied, 303 Or. 74, 734
P.2d 354 (1987), the trial court held that the trustees of a
charitable trust need not comply with the University’s divest-
ment resolution, as divestment would violate the statutory
prudent investor rule. The intermediate appellate court
reversed on the ground that the plaintiffs lacked standing to
challenge the trustees’ actions. 82 Or.App. 151, 728 P.2d at 33.

D-32

with objectives similar to those of the trust in
question.’ ”

Likewise, Baltimore City Code, Article 22, §§ 7(h) and
35(h), adopt the duty of prudence set forth in § 404(a) of
the Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. § 1104(1) (1982)%9:

“The Board of Trustees shall discharge its
duties...

(2) With the care, skill, prudence and dili-
gence under the circumstances then
prevailing that a prudent person acting
in a like capacity and familiar with
such matters would use in the conduct
of an enterprise of a like character and
with like aims.”

The trustees argue that the Ordinances alter the duty
of prudence by radically reducing the universe of eligible
investments.

There is no doubt that the Ordinances place some
limits on the scope of investment. Using the South Africa
Fund’s Unified List, the Trustees argue, for example, that
they are barred from investing in almost one-half of the
market capitalization of the S & P 500. In fact, the correct
figure may be substantially smaller, as the Trustees are
not bound by the South Africa Fund’s determinations.
Nevertheless, the Ordinances do exclude a not insignifi-
cant segment of the investment universe. Cf. Lanoff, The
Social Investment of Private Plan Assets: May It Be Done
Lawfully Under ERISA?, 31 Lab. L. J. 387, 391 (1980). The

30 As “governmental plans,” the City’s systems are exempt
from ERISA. 29 U.S.C. §§ 1002(32), 1103(b)(1) (1982).

D-33

City, however, has shown that, under the divestiture pro-
gram, economically competitive, substitute investments
remain available.

Furthermore, the Trustees’ emphasis on market cap-
italization is somewhat misleading.*! While the Ordi-
nances seem to ban investments in many larger
companies with a high market capitalization, numerous
opportunities remain available. Thus, under Judge Green-
feld’s findings, the Ordinances permit the Trustees to
construct an almost perfectly diversified portfolio, one
that accurately matches the market as a whole in all
respects except the size of the companies in which the
pension systems invest. Moreover, the Trustees’ inability
to demonstrate that divestiture will impair the portfolios’
equity performance indicates that a diversified, S.A.F.
portfolio can be managed consistently with the duty of
prudence. In fact, on cross-examination, the Trustees’ wit-
nesses conceded that, given a shift to “passive” manage-
ment, the funds could duplicate the performance of a
“target index,” such as the S. & P. 500. Thus, divestiture
does not imprudently increase risk or decrease income.

The Trustees’ chief concern seems to be that, by fore-
closing a certain range of investments, the Ordinances
will adversely affect the money managers’ active style.
Yet, assuming arguendo that this is true, there is in our

31 For example, as the trial court observed, the market
capitalization of IBM, a company apparently doing business in
South Africa, is equal to that of the 200 smallest companies on
the S. & P. 500.

D-34

opinion no contractual right to a particular management

style.22

The provisions regulating the divestiture program
reinforce our conclusion that the Ordinances do not
change the Trustees duty of prudence. The transition to
an S.A.F. portfolio is to occur gradually, over a two-year
period. The Ordinances expressly empower the Trustees
to suspend the divestiture program at any time for up to
90 days if they find, in essence, that divestiture has
become imprudent. See § 2(d), (e) of Ordinance No. 765.
The parties do not dispute the circuit court’s interpretive
rulings that the two-year period is extended for the
length of any valid suspension and that the Ordinances
do not limit the number of times the Trustees can sus-
pend the program. In addition, none of the parties has
challenged the trial court’s further rulings that, during a
suspension, the Trustees may make new investments in

32 While Judge Greenfeld concluded that the Ordinances
would not significantly affect the active style, some proponents
of divestiture disagree. See Dobris, Arguments in Favor of Fiduci-
ary Divestment of “South Afican” Securities, 65 Neb. L. Rev. 209,
240 n. 285 (1986). One of the Trustees’ witnesses did testify,
however, that the Ordinances have only a minimal affect on
certain active managers. These include “market-timers,” who
decide when to be in or out of the market, and “top-down
managers,” who first decide what types of stocks to buy and
then fill out their portfolios accordingly.

In any case, a shift to passive management would hardly
be imprudent. The Trustees admit that most active managers
underperform the market. Moreover, one of the Trustees’
experts conceded that passive management in the long run
provides more stability, lower transaction costs, and lower risk
than active management.

fe te oh tas gums a re. Boe:

D-35

companies doing business in South Africa and that the
Trustees may order a suspension at any time before the
time limit has run, even if total divestiture has already
occurred. We agree with these interpretative rulings by
the circuit court. In our opinion, there exist numerous
safeguards which guarantee that divestiture cannot occur
unless it would be consistent with the Trustees’ duty of
prudence.

ae

In a related argument, the Trustees contend that the
Ordinances alter the duty of prudence by mandating the
consideration of social factors unrelated to investment
performance. Under the circumstances of this case, we
disagree.

No less an authority than Professor Austin Wakeman
Scott rejected the proposition that “trustees are rigidly
bound to attempt to secure the maximum return, whether
as to income or principal, consistent with safety.” III Scott
on Trusts, § 227.17 (W. Fratcher 4th ed. 1988).33 Instead,
Professor Scott concluded (ibid.):

“Trustees in deciding whether to invest in, or to
retain, the securities of a corporation may prop-
erly consider the social performance of the cor-
poration. They may decline to invest in, or to
retain, the securities of corporations whose

33 This section, which initially appeared in the supple-
ments to the third edition of the treatise, was authored by
Professor Scott himself.

D-36

activities or some of them are contrary to funda-
mental and generally accepted ethical princi-
ples. They may consider such matters as
pollution, race discrimination, fair employment,
and consumer responsibility.”*4

For this position, Scott relied in part on an analogy to the
corporate fiduciary’s limited right to make charitable
contributions: just as the directors may conclude that
charitable contributions are in the corporation’s long-
term interests, so too a trustee “may well believe that a
corporation that has a proper sense of social obligation is

34 Similarly, in construing testamentary trusts, some have
urged that social factors should override even the testator’s
express directives. For example, in the litigation concerning the
desegregation of Girard College, a school established in Phila-
delphia in 1833 for “poor white male orphans,” it was asserted
that the testator’s philanthropic designs would best be served
by admitted male children of all races. Commonwealth of
Pennsylvania v. Brown, 392 F.2d 120, 125 (3d Cir.), cert. denied,
391 U.S. 921, 88 S.Ct. 1811, 20 L.Ed.2d 657 (1968); Girard
College Trusteeship, 391 Pa. 434, 480-481, 138 A.2d 844, 866
(Musmanno, J., dissenting), cert. denied, 357 U.S. 570, 78 S.Ct.
1383, 2 L.Ed.2d 1546 (1958). See also Clark, Charitable Trusts, The
Fourteenth Amendment and The Will of Stephen Girard, 66 Yale
L.J. 979, 990 (1957) (suggesting that the moral duty of trustees,
who were agents of the city, to Philadelphia’s two million
citizens “was scarcely less that that to one dead testator”).
Additionally, in Matter of London, 104 Misc. 372, 377-378, 171
N.Y.S. 981, 983-984 (1918), aff'd, 187 A.D. 952, 175 N.Y.S. 910
(1919), the Surrogate Court for New York County upheld an
investment in war bonds at 3-'/2% despite the testator’s
express command that the trustee should invest only in rail-
road bonds paying at least 4%. Noting that the nation was at
war and needed the “undivided aid, support and loyalty of
every citizen,” the court hypothesized that the testator would
have sanctioned this investment had he been alive. Ibid.

ros oe Oe ee ee ee

eee Son Besitet” ene

D-37

more likely to be successful in the long run than those
that are bent on obtaining the maximum amount of
profits.” Ibid. “But,” he continued, “even if this were not
so, the investor, though a trustee of funds for others, is
entitled to consider the welfare of the community, and
refrain from allowing the use of funds in a manner detri-
mental to society.” Ibid.

These views are consistent with the position that a
trustee’s duty is not necessarily to maximize the return
on investments but rather to secure a “just” or “reason-
able” return while avoiding undue risk. King v. Talbot, 40
N.Y. 76, 86 (1869); Withers v. Teachers’ Retirement System,
447 F.Supp. 1248, 1254, (S.D.N.Y. 1978), aff'd, 595 F.2d
1210 (2d Cir. 1979); HII] Scott on Trusts, supra, § 227.3;
Restatement (Second) of Trusts § 227 comment (e) (1957);
Dobris, Arguments in Favor of Fiduciary Divestment of
“South African” Securities, 65 Neb. L. Rev. 209, 232 (1986);
Ravikoff & Curzan, Social Responsibility in Investment Pol-
icy and The Prudent Man Rule, 68 Cal. L. Rev. 518, 519
(1980). Cf. Troyer, Slocombe & Boisture, Divestment of
South Africa Investments: The Legal Implications for
Foundations, Other Charitable Institutions, and Pension
Funds, 74 Geo. L. J. 127, 156-157 (1985). But see Langbein
& Posner, Social Investing and the Law of Trusts, 79 Mich. L.
Rev. 72, 99-104 (1980). As one commentator stated, a
“trustee is under no duty to open a brothel in Nevada,
where prostitution is legal, in order to maximize return to
beneficiaries.” Dobris, supra, 65 Neb. L. Rev. at 232. Thus,
if, as in this case, social investment yields economically
competitive returns at a comparable level of risk, the
investment should not be deemed imprudent.

D-38

The Mayor and City Council of Baltimore were moti-
vated to enact the Ordinances, in part, because the
Trustees’ prior investment practices offended a growing
number of the systems’ beneficiaries and residents of the
City. Moreover, given the vast power that pension trust
funds exert in American society,*° it would be unwise to
bar trustees from considering the social consequences of
investment decisions in any case in which it would cost
even a penny more to do so. Consequently we conclude
that if, as in this case, the cost of investing in accordance
with social considerations is de minimis, the duty of pru-
dence is not violated.*6 Accordingly, we hold that the
Ordinances do not alter that duty.”

35 “In 1980, public and private pension funds totaled more
than $550 billion, owned more than 25% of all publicly traded
stock, and controlled more than 40% of all debt capital in the
United States.” Troyer, Slocombe & Boisture, supra, 74 Geo. L. J.
at 154 n. 98 (citing McCarroll, Socially Responsible Investment of
Public Pension Funds: The South Africa Issue and State Law, 10
Rev. L. & Soc. Change 407 (1980-81)). Similarly, in 1980 the
United States Department of Labor projected that by 1995
private pension trust assets alone would total almost $3 tril-
lion. Lanoff, The Social Investment of Private Plan Assets: May It
Be Done Lawfully Under ERISA?, 31 Lab. L. J. 387, 387 (1980).

36 We recognize that, in absolute terms, the costs of dives-
titure may be large. As Judge Greenfeld pointed out, however,
the costs are de minimis when viewed in relation to the systems’
total assets.

3? As noted previously, although the systems are exempt
from ERISA, the Baltimore City code incorporates ERISA’s
language concerning the duty of prudence. Several

(Continued on following page)

ais A is

D-39

D.

Finally, the Trustees contend that the Ordinances
alter their duty of loyalty, which is implicit in the pension
contracts. We disagree that the Ordinances alter that duty.

Like the duty of prudence, the general duty of loyalty
is well-established in Maryland law. See, e.g., Goldman v.
Rubin, 292 Md. 693, 441 A.2d 713 (1982); Gianakos v.
Magiros, 238 Md. 178, 208 A.2d 718 (1965); Hughes v.
McDaniel, 202 Md. 626, 98 A.2d 1 (1953); Mangels v. Tip-
pett, 167 Md. 290, 173 A. 191 (1934); Diffenderffer v. Minder,
3 G. & J. 311 (1831). Moreover as with the duty of pru-
dence, the Baltimore City Code incorporates ERISA’s for-
mulation of the trustee’s duty of loyalty (Art. 22, §§ 7(h),
35(h)):

(Continued from previous page)

commentators have written that social investment is likely to
violate ERISA. See, e.g., Hutchinson & Cole, Legal Standards
Governing Investment of Pension Assets for Social and Political
Goals, 128 U. Pa. L. Rev. 1340 (1980); Lanoff, supra, 31 Lab. L. J.
at 390. See Langbein & Posner, Social Investing and the Law of
Trusts, 79 Mich. L. Rev. 72, 98-99 (1980). But see Revikoff &
Curzan, Social Responsibility in Investment Policy and The Pru-
dent Man Rule, 68 Cal. L. Rev. 518, 528-536 (1980). Nonetheless,
one of the Trustee’s own witnesses, a money manager, con-
ceded that his company did not believe that it violated ERISA
by building and managing S.A.F. portfolios subject to the fed-
eral Act. He justified this belief by stating that substituting
S.A.F. securities for other securities did not involve “taking
unusual risks.” Moreover, at the time of the ordinances’ enact-
ment, the City Council explicitly made the ERISA provisions
subject to limitations and conditions prescribed elsewhere in
Article 22. See Art. 22. §§ 7(h)(4), 35 (h)(4). The Ordinances are
such a prescribed limitation or condition.

D-40

“The Board of Trustees shall discharge its duti-
es ... solely in the interest of the members and
beneficiaries and:

(1) For the exclusive purpose of:

(i) providing benefits to members and
beneficiaries ... .”

The Trustees urge that, by requiring them to consider the
interests of persons other than the beneficiaries and by
requiring them to manage the systems for purposes other
than providing benefits, the ordinances change this duty.

It is clear that the trustee’s duty of loyalty extends
beyond a prohibition against self-dealing and conflict of
interest, two wrongs that are not present in this case.
Even if the trustee has no personal stake in a transaction,
the duty of loyalty bars him from acting in the interest of
third parties at the expense of the beneficiaries. See
Restatement (Second) of Trusts, § 170 comment q (1957);
Conway v. Emeny, 130 Conn. 612, 621-622, 96 A.2d 221, 225
(1953); In re Estate of Sedgwick, 74 Ohio App. 444, 461, 59
N.E.2d 616, 624 (1944).

Nevertheless, we do not believe that a trustee neces-
sarily violates the duty of loyalty by considering the
social consequences of investment decisions. If, as in this
case, the costs of considering such consequences are de
minimis, the trustee ordinarily will not have transgressed
that duty.

Although Professor Scott termed the trustee’s duty of
loyalty “[t]he most fundamental duty owed by the trustee
to the beneficiaries,” IIA Scott on Trusts, supra, § 170, he
clearly believed that that obligation could be reconciled
with considering the ethical implications of the trust’s

~ sp se ace ine pond ae ene

D-41

investments. See III Scott on Trusts, supra, § 277.17. Our
conclusion is consistent with that belief. Moreover, our
opinion in this case is broadly consistent with the require-
ment, embodied in the Baltimore City Code, that the
trustees act “solely in the interest of the beneficiaries,”
and “for the exclusive purpose . . . of providing benefits.”
As Professor Scott recognized, under some circumstances
trustees may well believe that, by investing in businesses
with “a proper sense of social obligation,” they will in the
long run best serve the beneficiaries’ interests and most
effectively secure the provision of future benefits. Ibid.

Consequently, the Ordinances do not change the
Trustees’ duties of prudence and loyalty, which are
implicit in the pension contracts.

For the foregoing reasons, we hold that the Ordi-
nances do not unconstitutionally impair the obligation of
contract.

IV.

The intervenors argue that the Ordinances “violated
their due process rights under the ‘taking’ clause of the
Fifth and Fourteenth Amendments” (Intervenors’ Brief, p.
40). The Intervenors reason that the initial and ongoing
costs of divestiture will reduce the future earnings of the
pension funds, consequently reducing the amount of
variable benefits payable to the beneficiaries. Because of
this reduction in the amount of variable benefits, accord-
ing to the Intervenors, there has been “a confiscation by
[the city] government” (/bid.) and “the beneficiaries have
been deprived of their right to constitutional due process

D-42

as their property has been taken without just compensa-
tion” (id. at p. 44).38

As previously pointed out, the Intervenors have a
contractual right to receive both defined benefits and
variable benefits. Moreover, the contractuai right to
receive these benefits constitutes property under Mary-
land law. Deering v. Deering, supra, 292 Md. at 122-128, 437
A.2d at 887-890. See Archer v. Archer, supra, 303 Md. at
356-357, 493 A.2d at 1079; Lookingbill v. Lookingbill, supra,
301 Md. at 286-290, 483 A.2d at 2-4.99

38 The Intervenors’ argument, as the quotation from their
brief indicates, invokes both the Due Process Clause of the
Fifth Amendment and the just Compensation Clause of the
Fifth Amendment. The substance of the argument, however,
seems to be based on the Just Compensation Clause. Clearly no
procedural due process argument is made. In addition, the
intervenors do not appear to advance a substantive due pro-
cess argument. To the extent that the intervenors might be
making a substantive due process argument, it is without
merit. See generally, e.g., Exxon Corp. v. Governor of Maryland,
437 U.S. 117, 124-125, 98 S.Ct. 2207, 2213, 57 L.E.2d. 91 (1978),
affirming Governor v. Exxon Corp., 279 Md. 410, 423-429, 370
A.2d 1102, 1110-1113 (1977). Ogrinz v. James, 309 Md. 381,
394-395, 524 A.2d 77 (1987); State v. Good Samaritan Hospital,
299 Md. 310, 325-326, 473 A.2d 892, appeal dismissed, 469 U.S.
802, 105 S.Ct. 56, 83 L.Ed.2d 7 (1984).

39 The Constitution does not create property rights.
Rather, such rights “are created and their dimensions are
defined by existing rules or understandings that stem from an
independent source such as state law... .” Board of Regents v.
Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548
(1972). See also Cleveland Board of Education v. Loudermill,
470 U.S. 532, 538, 105 S.Ct. 1487, 1491, 84 L.Ed.2d 494 (1985).

DY ed Lt ar

aac Rk) DI at Renae is ak hile RE SR RTO ki MRER.

Bhd ELIA NR Mat GRE A

lie Let a0 Nida Sik NL Raid

:
|
2
?

D-43

The Intervenors’ contractual right to receive benefits
does not, however, give them a right to direct or control
the investment of funds in Baltimore City’s pension sys-
tems. Absent a provision in the law to the contrary, the
beneficiaries of a public retirement system have no right
to direct the investment of the systems’ assets. Withers v.
Teachers’ Retirement System, supra, 447 F.Supp. at 1260 (the
beneficiaries of a public retirement fund “have no entitle-
ment to, or right to direct the retention of, the particular
assets that are held for investment purposes in the pen--
sion fund”); Crown v. Patrolmen’s Variable Supp. Fund
Trustees, 659 F.Supp. 318, 320 (S.D.N.Y.), aff'd, 819 F.2d 47
(2d Cir. 1987). See Tron v. Condello, 427 F.Supp. 1175,
1189-1190 (S.D.N.Y. 1976) (beneficiary “has a vested right
in receiving his pension benefits, but not in regulating the
investment policies set by the Legislature and the Retire-
ment Board”).

If the earnings of the pension funds were sufficient to
warrant the payment of variable benefits under the pen-
sion formula, and such payments were not made, the
beneficiaries could reasonably argue they had been law-
fully deprived of a property right. There is no sound
basis for the claim made in the present case, however,
that the beneficiaries’ property interest in future variable
benefits is unconstitutionally “taken” whenever the City
Council or the Trustees act in a way which might reduce
the earnings of the pension funds.

As the Supreme Court stated in Connolly v. Pension
Ben. Guar. Corp., 475 U.S. 211, 224-225, 106 S.Ct. 1018,
1026, 89 L.Ed.2d 166 (1986), quoting Penn Central Trans-
portation Co. v. New York City, 438 U.S. 104, 124, 98 S.Ct.

D-44

2646, 2659, 57 L.Ed.2d 631 (1978), its decisions under the

Just Compensation Clause
“have eschewed the development of any set for-
mula for identifying a ‘taking’ forbidden by the
Fifth Amendment, and have relied instead on ad
hoc, factual inquiries into the circumstances of
each particular case .... To aid in this deter-
mination, however, [the Court has] identified
three factors which have ‘particular signifi-
cance’: (1) ‘the economic impact of the regula-
tion on the claimant’; (2) ‘the extent to which the
regulation has interfered with distinct invest-
ment-backed expectations’; and (3) ‘the charac-
ter of the governmental action.’ ”

See Chevy Chase Savings & Loan v. State, supra, 306 Md. at
411, 509 A.2d at 684.

The economic impact of the Ordinances might be to
deprive the beneficiaries of some variable benefits they
would otherwise receive if the Ordinances were not in
effect. The degree of this impact is, however, substantially
reduced by “provisions in the Act that moderate and
mitigate the economic impact.” Connolly v. Pension Ben.
Guar. Corp., supra, 475 U.S. at 225, 106 S.Ct. at 1026. The
provision in the Ordinances allowing for the postpone-
ment of divestment, for example, and other provisions
previously discussed, mitigate any adverse impact on the
beneficiaries’ variable benefits.

The Ordinances do not interfere with “distict invest-
ment-backed expectations.” Connolly, supra, 475 U.S. at
225, 106 S.Ct. at 1926. The Supreme Court has stated: “A
reasonable investment-backed expectation must be more
than a ‘unilateral expectation or an abstract need.’ ”
Ruckelshaus v. Monsanto, 467 U.S. 986, 1005, 104 S.Ct. 2862,

i OA ERS LSPS

D-45

2874, 81 L.Ed.2d 815 (1984), quoting Webb’s Fabulous Phar-
macies v. Bechwith, 449 U.S. 155, 161, 101 S.Ct. 446, 451, 66
L.Ed.2d 358 (1980). Variable benefits are, as their name
suggests, speculative and uncertain. Whatever diminu-
tion of variable benefits the Ordinances might cause can-
not be said to interfere with a “distinct . . . expectation.”
As the Court said in Andrus v. Allard, 444 U.S. 51, 66, 100
S.Ct. 318, 327, 62 L.Ed.2d 210 (1979),

“loss of future profits - unaccompanied by any
physical property restriction — provides a slen-
der reed on which-to rest a takings claim. Pre-
diction of profitability is essentially a matter of
reasoned speculation that courts are not espe-
cially competent to perform. Further, perhaps
because of its very uncertainty, the interest in
anticipated gains has traditionally been viewed
as less compelling than other property-related
interests.”

Finally, the nature of the governmental action in this
case does not involve the government appropriating the
beneficiaries’ money for its own use or for the use of
others. Government regulation under “a public program
that adjusts the benefits and burdens of economic life to
promote the common good . . . does not constitute a
taking requiring Government compensation.” Connolly v.
Pension Ben. Guar. Corp., supra, 475 U.S. at 225, 106 S.Ct. at
1026. The Ordinances here do just that. Any reduction in
variable benefits is an incidental cost of the City govern-
ment’s efforts to promote the common good by regulating
its own investment policy.

We conclude that the Ordinances do not effect a
“taking” of the beneficiaries’ property in violation of the
Fifth Amendment.

D-46

V.

We next address the contention that the Comprehen-
sive Anti-Apartheid Act of 1986, Pub. L. No. 99-440, 100
Stat. 1086 (1986), codified in relevant part at 22 U.S.C.
§§ 2151, 2346(d), 5001-5116 (Supp. IV 1986), preempts the
Ordinances.4° Among other things, the federal Act pro-
hibits new American investment in South Africa; pro-
hibits the importation of certain South African products,
including krugerrands, uranium, and coal; forbids the
export of computer technology to the South African secu-
rity forces; limits American loans to the South African
government; and restricts nuclear trade with South
Africa. See 22 U.S.C. §§ 5051-5060. In addition, the federal
statute requires American businesses with more than 25
employees in South Africa to comply with the Sullivan
Principles, a code of fair employment practices for com-
panies operating in South Africa. 22 U.S.C. §§ 5034-5035.
Section 5061 provides for the termination, modification,
or suspension of the above sanctions if the South African
government makes progress towards abolishing apart-
heid. Conversely, § 5091 authorizes more stringent sanc-
tions if such progress fails to occur.

40 Amendments to the Comprehensive Anti-Apartheid Act
of 1986 have been introduced in both the House (H.R. 21, 101st
Congress, Ist Sess. (1989)) and Senate (S. 507, 101st Congress,
1st Sess. (1989)). These amendments, if enacted, would prohibit
any United States entity from purchasing or holding invest-
ments in South Africa under most circumstances.

latte yates ote

D-47

Federal law may preempt state or local law in differ-
ent ways.4*! Congress may preempt state law by expressly
stating its intention to do so. California v. ARC America
Corp., __ U.S. __, 109 S.Ct. 1661, 1665, 104 L.Ed.2d 86
(1989); Hillsborough County, Fla. v. Auto. Med. Labs., 471
U.S. 707, 713, 105 S.Ct. 2371, 2375, 85 L.Ed.2d 714 (1985).
The Anti-Apartheid Act of 1986 does not expressly pre-
empt state and local divestiture laws. Absent express
preemption, a court may infer a congressional intent to
preempt from a scheme of federal regulation sufficiently
comprehensive to occupy a given field or to make clear
that Congress left no room for supplementary state legis-
lation. California v. ARC America Corp., supra, 109 S.Ct. at
1665; Pacific Gas & Electric v. Energy Resources Comm., 461
U.S. 190, 204, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983);
Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct.
1146, 1152, 91 L.Ed. 1447 (1947). Moreover, even if Con-
gress has not completely preempted state regulation in a
particular area, state law is preempted to the extent that it
actually conflicts with federal law. California v. ARC Amer-
ica Corp., supra, 109 S.Ct at 1665. “Such a conflict arises
when ‘compliance with both federal and state regulations
is a physical impossibility’ .. . or when state law ‘stands
as an obstacle to the accomplishment and execution of the
full purpose and objectives of Congress.’” Hillsborough
County, Fla. v. Auto. Med. Labs., supra, 471 U.S. at 713, 105
S.Ct. at 2375.

41 “(Flor purposes of the Supremacy Clause, the constitu-
tionality of local ordinances is analyzed in the same way as
that of state laws.” Hillsborough County, Fla. v. Auto. Med.
Labs., 471 U.S. 707, 713, 105 S.Ct. 2371, 2375, 85 L.Ed.2d 714
(1985).

D-48

Nevertheless, so as not to place undue restrictions
upon state sovereignty, preemption is not lightly pre-
sumed. California Federal Sav. & Loan Ass’n v. Guerra, 479
U.S. 272, 281, 107 S.Ct. 683, 689, 93 L.Ed.2d 613 (1987);
Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114,
2129, 68 L.Ed.2d 576 (1981); Exxon Corp. v. Governor of
Maryland, 437 U.S. 117, 132, 98 S.Ct. 2207, 2217, 57
L.Ed.2d (1978), affirming 279 Md. 410, 370 A.2d 1102
(1977). Furthermore, in areas traditionally regulated by
state and local governments, there is a strong presump-
tion against finding federal preemption. California v. ARC
America Corp., supra, 109 S.Ct. at 1665; Hillsborough
County, Fla. v. Auto. Med. Labs., supra, 471 U.S. at 716, 105
S.Ct. at 2376; Pacific Gas & Electric v. Energy Resources
Comm., supra, 461 U.S. at 206, 103 S.Ct. at 1723; San Diego
Building Trades Council v. Garmon, 359 U.S. 236, 244, 79
S.Ct. 773, 779, 3 L.Ed.2d 775 (1959). In these circum-
stances there must be compelling evidence of congres-
sional intent to preempt. San Diego Building Trades Council
v. Garmon, supra, 359 U.S. at 244, 79 S.Ct. at 779.

Baltimore City’s regulation of investments by its
employees’ pension funds is clearly a matter of tradi-
tional local regulation. Therefore, the Ordinances enjoy a
strong presumption that they are not preempted. The
evidence with respect to congr

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0713%3A1. Public record. Not legal advice.