Legislature(1997 - 1998)
04/25/1997 03:30 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 178 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT Number 0311 CHAIRMAN ROKEBERG announced the committee would address HB 178 "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." He said Representative Ryan was the chairman of an informal subcommittee on HB 178. He asked Representative Ryan to make some recommendations to the committee. Number 0331 REPRESENTATIVE JOE RYAN said the first amendment would be on page 5, line 2, of Version A. Section 45.05.106(d) would be deleted which reads, "Notwithstanding a modification or revocation of a revocable credit, a person authorized to honor or negate, under the terms of the original credit, is entitled to reimbursement for or honor of a draft or demand for payment duly honored or negotiated before receipt of notice of the modification or revocation, and the issuer, in turn, is entitled to reimbursement from its customer." REPRESENTATIVE RYAN said, "The way that is set up here, except with the subsections of this, we've allowed a person to, in effect, arbitrarily go ahead and decide that they don't want to pay the letter of credit. What we want is these things if the documents are presented the way they're supposed to, they have the proper signatures, they have the stamps from the government authorities that require they have -- you have a document that's subject to payment. And this is the whole purpose in international trade of being able to get your money because the time value of money being what it is, someone holding you up can cause you to have the biggest problem you've had and for going out of business." Number 0490 REPRESENTATIVE RYAN said to insert 45.05.105(c) which reads, "Unless otherwise agreed, after a revocable credit is established, it may be modified or revoked by the issuer without notice to or consent from the customer or beneficiary." Representative Ryan said, "The person who would revokes the letter of credit if they haven't met the criteria -- you've established this thing and the banker is sending millions of dollars across for something and you don't get the paperwork back the way it's supposed to be, you sure don't want to pay because then you have to sue, internationally, to try to get your money back." He indicated this would ensure that these people are going to get paid in a timely manner when they're supposed to. Number 0556 REPRESENTATIVE COWDERY asked if this would still allow in the letter of credit to the issuer to the letter of credit to stop payment for legitimate reasons. REPRESENTATIVE RYAN said after a revocable credit is established, it may be modified or revoked by the issuer without notice to or consent from the customer or beneficiary which would allow you to make the stop payment. He explained you don't have to go to the person and say, "Do you agree that I stop this letter?" This basically allows a stop payment. Number 0608 REPRESENTATIVE RYAN indicated the next amendment would be on page 5, line 14, following the word "Formal" insert "and other." He explained this is about formal requirements and read, "A letter of credit, confirmation, advice, transfer, amendment or cancellation may be issued in any form that is record and is authenticated by a signature or under the agreements and so forth." He informed the committee that besides the original agreement, there may be other agreements. There may be side agreements. He said we want the latitude for the person making the letter of credit to put whatever agreements that are necessary in that letter. This gives them the flexibility rather than sticking with a formal agreement. Representative Ryan said not all situations are dealt with on a formal basis. He said following "requirements" insert "(a)." Number 0700 REPRESENTATIVE RYAN informed the committee that the next amendment is on page 5, line 15, following "authenticated" insert, "by the signature of the issuer, the signature of the beneficiary, the signatures of two bank officers of the issuer if the issuer is a bank, and the signature of the issuer if the issuer is not a bank." He explained it says the form is a record, it's authenticated and we're trying to show them how this is authenticated by the person who is issuing it, beneficiary of the issuer or two bank officers acting on behalf of the issuer. Number 0745 REPRESENTATIVE COWDERY questioned who other than a bank issues letters of credit. REPRESENTATIVE RYAN responded, "Trading houses who deal in international trading, brokerage houses who deal with vast commodities of (indisc.) and/or petroleum, gold, diamonds, currencies, people who actually have the things themselves and have the financial resources." REPRESENTATIVE COWDERY questioned who issues the common letter of credit. REPRESENTATIVE RYAN said it's usually a bank, but there are other people, especially those who deal in gold. They change currency for gold. Number 0810 REPRESENTATIVE RYAN indicated the next amendment is on page 5, delete lines 17 through 19. He explained that what is being deleted are the provisions by a signature or under the agreement. He said this is covered in the previous part of the amendment. REPRESENTATIVE RYAN said, "Now we're talking about talking about the time limits when we insert this, `A letter of credit must contain a provision that if an issuer does not honor a letter of credit within the time established under AS 45.05.108(b), even if a notice of discrepancy is given, an impartial third party shall determine the amount of any interest and damages that are owed to the beneficiary. The provision must also establish procedures for carrying out the provision, including how the third party is selected.'" He pointed out that this is similar to a dispute resolution and a lot of contracts that are done under an international basis, you have to find out a law that is common to all the jurisdictions to resolve the dispute and it's usually added in a contractual arrangement. He said, "If you do not redeem this letter and you've received the funds and you don't honor it, you're sitting with the money and the longer you can keep from honoring that, the more money you're going to make on the float from the money you're keeping. So this gives a person a basis to have an impartial third party decide whether you're claim is justified or not, you should be paid and then you get to find out that -- keep the interest and/or the damages that were caused by this person not honoring this letter of credit." He noted most of these things are done by electronic transfer and the person has the money. They just want to sit on it awhile and tell you why they don't want to honor the letter and in the meantime, they're making a lot of money by doing that. He said this would be a little more equitable for people to get prompt payments so they can continue to conduct business. Number 0959 REPRESENTATIVE RYAN informed the committee the next amendment would be to delete page 5, line 27, through page 6, line 2, which reads "(b) After a letter of credit is issued, rights and obligations of a beneficiary, applicant, confirmer, and issuer are not affected by an amendment or cancellation to which the beneficiary, applicant, confirmer, or issuer has not consented, except to the extent the letter of credit provides that the letter of credit is revocable or that the issuer may amend or cancel the letter of credit without the consent." He informed the committee that is not a good business practice. When you set up a letter of credit, it is usually set up on terms that have previously been negotiated. He again read the amendment and said it only leaves one thing saying it provides that it is revokable. Representative Ryan said a lot of the times there are a lot of amendments made to the disposition afterwards because situations change. I could be a large commodity purpose and all the commodities can't be delivered at one time such as with large amounts of currencies. He said these things are paid for in what is called a "tronch." You may have a $1 billion currency transaction, most banks don't have a liquidity to come up with $1 billion at one time, so they will do it in tronches of perhaps $250 million. Representative Ryan said there are access and confirmation codes. There are a number of things that have to happen in a sequence. By doing this in tronches, it may take three or four months to make everything work. He said, "Then you would modify, you would make an agreement. And what they're saying here is that you're rights and so forth are going to be -- once that's issued you're rights are going to be -- unless a letter is revokable, the issuer may amend or cancel a letter of credit without consent. Well, if I've got all this money hanging out there and it's half in process of being - the deal being completed, I don't want anybody revoking that letter of credit. I want to be able to have the ability to make what adjustments are necessary to make this deal go through." Number 1176 REPRESENTATIVE RYAN indicated the next change is on page 7, line 7 through 14, delete, "An issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of the issuer's receipt of documents to honor the presentation;". He gave the following example, "I would personally love to be able to resign from this legislature and to receive the amounts of money that are received in letters of credit and hold on to them for seven days and invest that money for seven days and I wouldn't have to do anything for the rest of my life except sail around in my 100 foot sailboat - green water, white beaches." He said holding someone's money for seven days without paying them for it is outright theft. This would make sure that the banks dealing with this are able to make their interest payments to their depositors and, therefore, to keep all the rest of the return they make on the money, because on the side business of (indisc.) letters of credit, they're sitting there getting the interest. Representative Ryan said domestically, the money has been wire transferred and when you make the presentation of documents, there is no reason for anybody to hold on to your money for seven days. In international transactions, federal requirements are three days and anything longer than three days, you should be able to present the documents and receive the money without the bank having a period of time above those three days to hold you're money. He indicated wording should be inserted which would read, "(b) Unless the letter of credit provides for a different time, after receipt of documents, an issuer shall honor the presentation, or give notice to the presenter of discrepancies in the presentation, when demand is made for honor of the issuer is located in the United States, or within three days after receipt of the documents if the issuer is not located in the United States." He said the subcommittee felt this was reasonable as you want to be paid when you want to be paid. Number 1315 REPRESENTATIVE RYAN explained the next amendment is on page 11, line 10, following "transferable" insert "or assignable, which may include assignment of proceeds under AS 45.05.114,". He referred to any document that has a value and said you can assign it to another individual for payment and move on about your business. He said they wanted the flexibility of transferrable or assignable. Representative Ryan read from 45.05.114, "Issuer's duty and privilege to honor; right to reimbursement. (a) An issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary. The issuer is not excused from honor of the draft or demand by reason of an additional general term that all documents must be satisfactory to the issuer, but an issuer may require that specified documents must be satisfactory to it." Representative Ryan explained another common way to hang onto money and keep it from being paid is to say, "Well, you're paperwork is not quite right, you're going to have to go and do something else." Number 1436 REPRESENTATIVE RYAN explained the next change is on page 11, line 14, after the word "if" insert "the transfer or assignment would violate applicable law." Number 1450 REPRESENTATIVE RYAN referred the committee members to page 11, lines 15 through 20. He said, "Since we put this extra language in there, we don't feel that this stuff is necessary. So it cleans up that portion." Number 1468 REPRESENTATIVE RYAN said on page 11, line 22, following "(a)" delete "A", which is a subsection, and insert "If allowed by the letter of credit under AS 45.05.112, a". Number 1502 REPRESENTATIVE RYAN informed the committee the last change is on page 12, line 3, following "issuer" insert "and the beneficiary". He said this protects the issuer and the beneficiary. Number 1538 CHAIRMAN ROKEBERG said it is not his intention to move the bill as the committee members just received the proposed amendment and he would like everybody to have an opportunity to understand it. He said it is his intent to bring the bill back up the following Wednesday. Number 1637 ART PETERSON, Uniform Law Commissioner, State of Alaska, came before the committee to testify. He noted he is also an attorney in private practice. Mr. Peterson indicated Representative Ryan didn't contact him, any of the other uniform law commissioners or the director of the Division of Banking. He said HB 178 is a major piece of legislation of significance around the country and it is currently being enacted regularly throughout the country. Mr. Peterson said, "For Alaska to go off in its own tangent when we are not simply addressing unique about Alaska - something to address our own situation - is probably not a good idea. I have kind of a negative attitude toward a set of amendments like this." MR. PETERSON continued, "I noticed that Representative Ryan was checking the statute book to read to you some of the provisions when there was a cross-reference to some other section. In fact, the sections referred to are sections in this like that Section 114 that we were just looking at, for example, is repealed and reenacted in the bill. So you don't want to read the text that's in the book when you read the cross-reference that's in the bill, to the other section that's in the bill. You want to read that section for the current text. And that's subsection `(C)' versus `(D)' that we started out with in this set of amendments - same situation there. The cross-reference is in the bill, not in the book. So with that warning, as you study this matter, you might want to keep that in mind." Mr. Peterson said he would like to defer to Mr. Kurtz or Mr. Kirkpatrick. Number 1783 L. S. "JERRY" KURTZ, JR., Uniform Law Commissioner, State of Alaska, testified via teleconference from Anchorage. He informed the committee members he practices law maybe 10 percent of the time, but he is otherwise retired. Mr. Kurtz said he hasn't seen the amendments. He said he would second the comments of Mr. Peterson. Mr. Kurtz said it sounds to him that a number of the provisions are founded upon very good ideas that Representative Ryan has in recognition of real problems. He said, "That drawing of -- in the fashion they've drawn will simply make credit more expensive and harder to get for anybody in Alaska seeking a letter of credit. I think I've heard enough about the amendments to know that if I were representing any bank, which I no longer do but did for 25 years, that I would advise them to oppose the amendments. And if they were involved in trying to issue a letter of credit under them, I would be telling them to be a whole lot more cautious and charge more for the letter of credit and be sure they had an attorney looking at the terms of the situation very carefully since Alaska no longer had the uniform act." Number 1872 CHAIRMAN ROKEBERG asked Mr. Kurtz if the bill was brought before the committee the following Wednesday, would that be adequate time for him to review the amendments. MR. KURTZ indicated he would have time to review the amendments by that time. He noted that Mr. Peterson's suggestion to have direct contact with whoever put the amendments together is a very good suggestion. Number 1913 CHAIRMAN ROKEBERG asked Mr. Kurtz if he could make any recommendations of any banking institutions and a specific person the committee could speak to that may have a vested interest in the legislation. MR. KURTZ suggested the committee speak to Wes Coyner who represents banks. Also, the committee may want to speak to John Beard, Attorney, who does most a lot of work for the First National Bank of Anchorage. Number 1984 DOUGLAS LOTTRIDGE, Assistant Attorney General, Commercial Section, Civil Division, Department of Law, spoke to the committee via teleconference from Anchorage. He said he is working with Mr. Kurtz on the issue and has been in touch with Mr. Peterson. Mr. Lottridge said in his review of the bill, there has been a considerable amount of time spent by the drafters trying to balance the interests of both the issuers and the beneficiaries under the letters of credit. For instance, the time period of seven days was balanced. In an earlier bill there was a time period of three days, but there wasn't a specific requirement that the notice be given by the issuer of what was wrong with it. Mr. Lottridge said, "In the commentary of that particular section, the commentator suggests whether it's a practical matter or not the banks are not automatically or the issuers are not automatically allowed to hold it for seven days. It says, `Whatever is a reasonable time or seven days.' And something much less than seven may be reasonable. I understand the practicalities." Mr. Lottridge said he would take time to review the amendments. CHAIRMAN ROKEBERG asked Mr. Lottridge to provide some written comments relating to the Uniform Act and the commentary as to the issue of the three-day period. Number 2090 WILLIS KIRKPATRICK, Director, Division of Banking, Securities and Corporations, Department of Commerce and Economic Development, came before the committee. He indicated he doesn't have any definite comments to make on letters of credit other than to say as far as financial institution regulation, his division examines letters of credit probably more indepth than the loans that banks have on their books. He stated one of the reasons that letters of credit are so important to the division is that in a lending obligation, a borrower will draw down on a loan as whatever he's borrowing his money for progresses. In a letter of credit, especially if they exceed a year, a lot of things can happen within that year - collateral can move, economies can change, borrowers can go broke. Mr. Kirkpatrick said, "One bank I can talk about because it doesn't exist, United Bank of Alaska that issued a letter of credit in the, I believe it was in the reconstruction of World War II fighter planes in Japan. And management changed at the bank and the new management came to realize that they had made a mistake on that issuance of a letter of credit, their collateral was out of the country at that particular time. And the bank lost it, the bank refused to honor the letter of credit. The court said, `Sorry Charlie, you made the obligation. The obligation was on good faith. You need to disburse on it,' and they did. And it was a loss." MR. KIRKPATRICK said based on contingencies that are not always at the control of the financial institution, he would take a very close look at those obligations. He indicated it's in the department's regulations, so that there won't be a misunderstanding, they will examine and charge those off as they see fit as to whether they are substandard, doubtful or lost. As regulators, they take a close look at those types of obligations. They look at the instruments on a basis as far as an obligation contract. In that light, they rely on the Uniform Commercial Code for those types of readings as to what is an obligation on a contract. Number 2227 REPRESENTATIVE RYAN asked if it is not common practice when people are setting up these kinds of transactions that they exercise due diligence as far as with whom they're setting up the contracts in that the person is capable of performing. MR. KIRKPATRICK indicated that is a common practice and that is what his division examines. He said they like to see letters of credit backed by cash or better. It is always nice to have a certificate of deposit for the same amount of money that is issued in a letter of credit. Mr. Kirkpatrick said they run into problems with the larger financial institutions. He said it could be very complex and involved as you get down to the purpose that an obligation has created. Generally, the businesses are well established and as a normal course of business, it normally has a history behind it. He noted he would forward some names to the committee of people in Alaska who deals with letters of credit on a more of a day to day basis. Number 2364 CHAIRMAN ROKEBERG said the bill would be held over and discussed again the following Wednesday.
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