California Attorney General Opinion No. 79-411

1 79-411 TO BE PUBLISHED IN THE OFFICIAL REPORTS OFFICE OF THE ATTORNEY GENERAL State of California GEORGE DEUKMEJIAN Attorney General _________________________ OPINION of GEORGE DEUKMEJIAN Attorney General Anthony S. Da Vigo Deputy Attorney General : : : : : : : : : : : No. 79-411 July 11, 1979 SUBJECT: SECTION 2955 OF THE CALIFORNIA CIVIL CODE—This section which requires money held in impound accounts to be retained and invested only in California, is constitutional. The Honorable Bill Lancaster, Assemblyman, Sixty-Second District, has requested an opinion on the following question: Is section 2955 of the California Civil Code, which requires money held in impound accounts to be retained and invested only in California, constitutional? CONCLUSION Section 2955 of the California Civil Code, which requires funds collected periodically to pay taxes, insurance, and other assessments on real property in this state to be retained or invested in this state, is constitutional. 2 79-411 ANALYSIS Section 2955 of the Civil1 Code provides as follows: “(a) Money held by a mortgagee or a beneficiary of a deed of trust on real property in this state, or held by a vendor on a contract of sale of real property in this state, in an impound account for the payment of taxes and assessments or insurance premiums or other purposes on or relating to the property, shall be retained in this state and, if invested, shall be invested only with residents of this state in the case of individuals, or with partnerships, corporations, or other persons, or the branches or subsidiaries thereof, which are engaged in business within this state. “(b) The Attorney General may bring an action in behalf of the people of California to enjoin any violation of subdivision (a).” The principal inquiry is whether the specific limitations set forth in subdivision (a) of the statute are constitutional. Initially, such economic legislation is presumed to be constitutional; constitutional insufficiency must be clearly demonstrated, and any uncertainty will be resolved in favor of its validity. (People v. Globe Grain Milling Co. (1930) 211 Cal. 121, 127; Alabama State Federation of Labor v. McAdory (1945) 325 U.S. 450, 470.) A review of both the state and federal constitutions reveals three principal provisions which pertain to the present inquiry: these provisions, relating to due process of law, equal protection of the laws, and interstate commerce, are discussed below. Section 1 of the Fourteenth Amendment to the Constitution of the United States provides inter alia that no state shall deprive any person of life, liberty, or property, without due process of law. A virtually identical proscription is found in the California Constitution, article 1, section 7. The concept of substantive due process requires that a statute must bear a rational relationship to a legitimate governmental objective. (Williamson v. Lee Optical Co. (1955) 348 U.S. 483, 491.) However, the law need not be in every respect logically consistent with its aims to be constitutional; the courts will not review the wisdom or providence of state laws regulatory of business and industrial conditions. (Id., at 487–488; Ferguson v. Skrupa (1963) 372 U.S. 726, 731–732.) As stated in Ferguson v. Skrupa, supra, at 729–731: 1 Hereinafter, all section references are to the Civil Code unless otherwise indicated. 3 79-411 “. . . Under the system of government created by our Constitution, it is up to legislatures, not courts, to decide on the wisdom and utility of legislation. . . .” “. . . It is now settled that States ‘have the power to legislate against what are found to be injurious practices in their internal commercial and business affairs, so long as their laws do not run afoul of some specific federal constitutional prohibition, or of some valid federal law.’” It is apparent that impound accounts for the payment of taxes and other charges relating to real property in this state have become the subject of particular legislative concern. (See Civ. Code, § 2954 et seq.; and cf. Abrams v. Crocker Citizens Nat. Bank (1974) 41 Cal. App. 3d 55.) Thus, section 2954 provides that, with certain exceptions, no impound, trust, or other type of account for payment of taxes on the property, insurance premiums or other purposes relating to the property shall be required as a condition of a real property sale contract or a loan secured by a deed of trust or mortgage on real property containing only a single family, owner-occupied dwelling. Moreover, prior to the execution of a loan or sale agreement in connection with which such an account is established, the seller or lender must furnish to the purchaser or borrower a statement in writing to the effect that the establishment of such an account shall not be required as a condition to the execution of the loan or sale agreement. Section 2955 provides that funds held in an impound account which are not invested shall be retained in this state, and that such funds may be invested only with residents of this state or with business concerns which are engaged in business, and subject to process (cf. Code Civ. Proc., §§ 416.10(d), 416.40(c)), in this state. The basic purpose of section 2955 is to make funds held for payment of taxes and insurance premiums readily accessible for such specified purposes. Such funds are generally accumulated in small monthly increments for limited short terms and often remain in cash or its equivalent in demand deposits. The statute is designed to protect the mortgagee, beneficiary, or vendor by safeguarding its obligation to make payments as and when due, the buyer-taxpayer on whose behalf such accounts are maintained and disbursements made by facilitating access and recovery of such funds, as well as the state and its political subdivisions which have a direct interest in the payment of taxes and an indirect interest in the payment of insurance premiums which protect the value and assessed valuation of the property. In view of the foregoing, it clearly appears that section 2955 does bear a rational relationship to a legitimate governmental objective. Section 1 of the Fourteenth Amendment further provides inter alia that no state shall deny to any person within its jurisdiction the equal protection of the laws. The concomitant provision of the California Constitution is contained in article 1, section 7. It is evident that section 2955 does establish a classification between residents of this state and nonresidents, and between partnerships, corporations, or other persons which are engaged in business 4 79-411 within this state and those which are not. However, in the absence of a “suspect classification” (cf. San Antonio Ind. Sch. Dist. v. Rodriguez (1973) 411 U.S. 1, 28; Massachusetts Board of Ret. v. Murgia (1976) 427 U.S. 307, 313; Sail’er Inn Inc. v. Kirby (1971) 5 Cal. 3d 1, 18) or of a “fundamental right” (cf. San Antonio Ind. Sch. Dist. v. Rodriguez, supra, at 33–34; D’Amico v. Board of Medical Examiners (1974) 11 Cal. 3d 1, 18), the constitutional right to equal protection requires only that the subject classification bear some rational relationship to a legitimate governmental purpose. (Schwalbe v. Jones (1976) 16 Cal. 3d 514, 517–518; Dandridge v. Williams (1970) 397 U.S. 471,485; 62 Ops. Cal. Atty. Gen. 106 (1979).) Again, it is determined, in view of the manifest purposes and design of the statute as previously set forth, that section 2955 does bear a rational relationship to a legitimate governmental purpose. We turn next to article 1, section 8, clause 3 of the United States Constitution which provides that Congress shall have the power to “regulate commerce with foreign nations, and among the several States, and with the Indian tribes.” In City of Philadelphia v. New Jersey (1978) 437 U.S. 617, 623–624, the United States Supreme Court set forth the following basic principles: “Although the Constitution gives Congress the power to regulate commerce among the States, many subjects of potential federal regulation under that power inevitably escape congressional attention ‘because of their local character and their number and diversity.’ South Carolina State Highway Dept. v. Barnwell Bros., Inc., 303 U.S. 177, 185. In the absence of federal legislation, these subjects are open to control by the States so long as they act within the restraints imposed by the Commerce Clause itself. See Raymond Motor Transportation, Inc. v. Rice, 434 U.S. 429, 440. The bounds of these restraints appear nowhere in the words of the Commerce Clause, but have emerged gradually in the decisions of this Court giving effect to its basic purpose. That broad purpose was well expressed by Mr. Justice Jackson in his opinion for the Court in H. P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 537–538: “This principle that our economic unit is the Nation, which alone has the gamut of powers necessary to control of the economy, including the vital power of erecting customs barriers against foreign competition, has as its corollary that the states are not separable economic units. As the Court said in Baldwin v. Seelig, 294 U.S. [511], 527, “what is ultimate is the principle that one state in its dealings with another may not place itself in a position of economic isolation.”’ 5 79-411 “The opinions of the Court through the years have reflected an alertness to the evils of ‘economic isolation’ and protectionism, while at the same time recognizing that incidental burdens on interstate commerce may be unavoidable when a State legislates to safeguard the health and safety of its people. Thus, where simple economic protectionism is effected by state legislation, a virtually per re rule of invalidity has been erected. . . .” The court cited, by way of example, the following cases in which state legislation was declared invalid (id., 624): H. P. Hood & Sons, Inc. v. Du Mond (1949) 336 U.S. 525 (overturned the denial of a license by the state of New York to operate additional facilities to acquire and ship milk in interstate commerce on grounds that such limitation upon interstate business would protect and advance local economic interests); Toomer v. Witsell (1948) 334 U.S. 385 (overturned a South Carolina statute which required owners of shrimp boats engaged in commercial fishing to dock, unload, pack, and stamp their catch with a tax stamp before shipping or transporting to another state); Baldwin v. G.A.F. Seelig, Inc. (1935) 294 U.S. 511 (overturned a New York statute which prohibited sale of milk imported from another state unless the price paid in the other state to the producer met a minimum prescribed for purchases from local producers); Buck v. Kuykendall (1925) 267 U.S. 307 (overturned a Washington statute which regulated competition of interstate carriers within the state by requiring a certificate of public convenience and necessity); Hunt v. Washington Apple Advertising Comm’n (1977) 432 U.S. 333 (overturned a North Carolina statute which required all closed containers of apples shipped into the state to bear no grade other than the applicable U.S. grade or standard); Great Atlantic & Pacific Tea Co., Inc. v. Cottrell (1976) 424 U.S. 366 (overturned a Mississippi regulation which provided that milk from another state may be sold in Mississippi only if the other state accepted milk produced and processed in Mississippi on a reciprocal basis). Thus, the crucial inquiry is whether the statute in question “is basically a protectionist measure, or whether it can fairly be viewed as a law directed to legitimate local concerns, with effects upon interstate commerce that are only incidental.” (City of Philadelphia v. New Jersey, supra, 437 U.S. 617, 624; cf. 52 Ops. Cal. Atty. Gen. 25, 27 (1969).) Unlike the statutes at issue in the cases above cited, both the purpose and design of section 2955 are directed to legitimate local concerns, namely, to maintain ready accessibility of the impounded funds to pay the taxes and insurance for which they were collected. It is apparent that neither the force nor effect of the statutory scheme of which the subject provision is a part, is to promote local enterprise. Where a statute, as here, is not a matter of “simple economic protectionism,” and other legislative objectives are credibly advanced, the Supreme Court has adopted the more flexible approach set forth in Pike v. Bruce Church, Inc. (1970) 397 U.S. 137, 142: 6 79-411 “Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. . . . If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.” (See City of Philadelphia v. New Jersey, supra.) In Hughes v. Oklahoma (1979) U.S. —; 47 LW 4447, 39 CCH S. Ct. Bull., p. B2208, the Supreme Court again referred to the quoted language in Pike v. Bruce Church, Inc., supra, and expounded as follows: “Under that general rule we must inquire (1) whether the challenged statute regulates evenhandedly with only ‘incidental’ effects on interstate commerce, or discriminates against interstate commerce either on its face or in practical effect; (2) whether the statute serves a legitimate local purpose; and, if so, (3) whether alternative means could promote this local purpose as well without discriminating against interstate commerce. The burden to show discrimination rests on the party challenging the validity of the statute, but ‘[w]hen discrimination against commerce . . . is demonstrated, the burden falls on the State to justify it both in terms of the local benefits flowing from the statute and the unavailability of nondiscriminatory alternatives adequate to preserve the local interests at stake.’ Hunt v. Washington Apple Advertising Commission, 432 U.S. 333, 353 (1977). . . .” We first examine the extent to which section 2955 discriminates against interstate commerce. The statutory restriction, which is expressly limited to funds held by a mortgagee, beneficiary of a deed of trust, or vendor of real property located within this state, applies equally to all such lenders whether they are situated within or without the state. Moreover, except with respect to individual residents of this state, such funds may be invested with partnerships, corporations, or other persons, or the branches or subsidiaries thereof, regardless of location, provided that they are engaged in business within this state. Nevertheless, section 2955 does require that impound funds remain within the state, and to that extent has a discriminatory effect upon interstate commerce. The question presented, therefore, is whether the state can justify it both in terms of the local benefits flowing from the statute and the unavailability of nondiscriminatory alternatives adequate to preserve the local interests at stake.” (Pike v. Bruce Church, Inc., supra.) In this regard, our attention has not been directed, nor are we aware of any available alternative means which could promote as well the purposes of the statute without discriminating against interstate commerce. 7 79-411 While we cannot conduct the same searching inquiry into these issues of fact as would be provided by judicial process, we believe that sufficient local justification for section 2955 could be established to warrant a finding by a court that the benefits of the statute outweigh the incidental burdens on interstate commerce and to produce a declaration that it is not violative of the Commerce Clause. *****