Legislature(1999 - 2000)
02/26/1999 03:19 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 79 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT
Number 0207
CHAIRMAN ROKEBERG announced the committee's first order of business
was HB 79, "An Act relating to letters of credit under the Uniform
Commercial Code; and providing for an effective date." The
chairman indicated the same bill had been introduced the previous
session and had received a very thorough House Labor and Commerce
Standing Committee and subcommittee hearing, proceeding through the
House, but not the Senate. [The sponsor statement read:
The basic purpose of the revision of Article 5 of the
Uniform Commercial Code [UCC] is to update the law
governing the $200 billion U.S. letter-of-credit
industry. All 50 states and Puerto Rico, Guam, and the
District of Columbia have adopted the UCC, including
Article 5. It now necessary for Article 5 to be revised,
to recognize changes in technology and in commercial
practices, so as to avoid litigation over the increasing
number of issues that are no longer adequately dealt with
in the decades-old current law. One of the main features
of this revision is the simplification of Article 5.
Another is its recognition of the Uniform Customs and
Practices for Documentary Credits, a body of material
that is used in conjunction with most international
letters of credit.
Letters of credit are used to obtain payment as a backup
to other kinds of credit extension; they are very
important in international trade. Prior ambiguities in
the law dealing with the concept of fraud in the
transaction are clarified. Article 5 becomes much
simpler and less detailed because of the explicit
reliance upon standards of practice. It continues to
provide rules that can be waived or modified by agreement
between the parties.
This revision of Article 5, promulgated by the National
Conference of Commissioners on Uniform State Laws in
1995, has already been enacted in 39 jurisdictions and,
as of January 15 of this year, is pending in the
legislature of an additional jurisdiction. It is
necessary for Alaska to enact this bill in order to keep
up with the developments in the commercial law area, and
avoid becoming a commercial backwater.]
Number 0269
REPRESENTATIVE MURKOWSKI asked if the bill was identical to the
previous bill.
CHAIRMAN ROKEBERG indicated that was his understanding. He noted
Mr. Usera from the Department of Law was there to assist in
presenting the legislation, in the absence of Art Peterson, the
uniform law commissioner and drafter of (indisc.).
Number 0310
VINCENT USERA, Assistant Attorney General, Commercial Section,
Civil Division (Juneau), Department of Law, came forward to testify
on HB 79. He noted he was present in the absence of others besides
Mr. Peterson as well. Mr. Usera said he had received the
assignment only that day, was somewhat familiar with the issue and
could answer general questions, but was not prepared to answer
major questions. He stated he'd been told it was exactly the same
as the previous year's legislation, it was a uniform bill, and that
there were no legal problems with it. It modernizes letter of
credit law.
Number 0386
CHAIRMAN ROKEBERG called a brief at-ease at 3:23 p.m. The
committee came back to order at 3:24 p.m.
Number 0390
CHAIRMAN ROKEBERG stated his best recollection of the legislation
was that, as noted in the bill, a number of states had already
adopted this provision of the Uniform Commercial Code. It provides
for letters of credits, the main types of instruments in the
practice of international banking, particularly. The chairman
indicated Alaska's statutes were outmoded and it was necessary to
bring the state's practices for international finance and exchange
up-to-date. Alaska is one of the few states which has not yet
adopted this. He recalled that Art Peterson [of Juneau] and Jerry
Kurtz of Anchorage, two of Alaska's uniform law commissioners
serving on the uniform law committee, had done some very thorough
work on the previous session's legislation.
Number 0469
REPRESENTATIVE HARRIS asked why the previous bill had not passed
the Senate last year.
CHAIRMAN ROKEBERG commented the bill had died of "legislative
inertia" in the Senate Judiciary Standing Committee. He confirmed
there hadn't been any serious problems with the bill.
Number 0506
REPRESENTATIVE MURKOWSKI, drawing a parallel to the current HB 83
and financial repercussions that would arise if that legislation
was not adopted by its deadline, asked what the downside was to not
moving HB 79 this legislative session besides simply failing to be
on the same level as the other states that had adopted it.
CHAIRMAN ROKEBERG replied it was an impediment to commerce in the
state, putting Alaska out of coordination with other states. He
indicated the importance of international trade to Alaska's export
industries and that foreign banks were used to working with the
UCC.
Number 0606
MELODY LITTLE, Assistant Vice President, National Bank of Alaska;
Alaska Bankers Association, testified via teleconference from
Anchorage in support of HB 79 on behalf of both organizations. Ms.
Little noted she had some questions in reference to changes being
made. In Section 21, page 16, line 24, a new paragraph was being
added to existing statute but the new language was not underlined.
She questioned since it was not underlined, whether that was the
section being added.
CHAIRMAN ROKEBERG indicated it was not underlined because it was an
new paragraph.
Number 0682
MS. LITTLE referred to subsection (g) on page 8 [lines 2 through
4], "(g) If an undertaking constituting a letter of credit under AS
45.05.102(a)(10) contains nondocumentary conditions, an issuer
shall disregard the nondocumentary conditions and treat them as if
they were not stated." She questioned whether this meant that if
documents were presented for payment when the documents were not a
required item in the letter of credit, they [the banking
institution] could disregard this.
CHAIRMAN ROKEBERG asked for Mr. Usera's assistance.
Number 0752
MR. USERA noted he read, "It says you'll disregard the
nondocumentary conditions."
CHAIRMAN ROKEBERG referred to the attached February 17, 1999
sectional analysis from Legal Services, Division of Legal and
Research Services, Legislative Affairs Agency, by Theresa
Bannister, Legislative Counsel. He noted that analysis stated, "AS
45.05.108(g). Directs an issuer to ignore certain nondocumentary
conditions contained in a letter of credit." The chairman
confirmed Ms. Little had no further testimony. He asked if she
worked in the banking area that handled letters of credit.
Number 0827
MS. LITTLE replied she had worked in the international division of
National Bank of Alaska for approximately 13 years. In response to
the chairman's request for a "thumbnail sketch" describing letters
of credit and how they worked in her industry, Ms. Little stated a
letter of credit was a contingent liability. For example, there
could be a Japanese customer buying fish from an Alaskan fish
processor, the two parties might not be familiar with each other
and ask banks to mediate for them. The buyer's bank will issue a
letter of credit stipulating certain documents for payment. In
exchange for those documents, payment will be made to the supplier.
The issuing bank, the customer's bank, books the letter of credit
as a contingent liability, with the understanding the buyer will
repay the bank; and, in the event the bank is not paid back, it has
some form of collateral or support. The supplier is assured it
will receive payment as long as it provides the documents required
in the letter of credit and does not transfer the goods to the
buyer without that payment. With the bank being the mediator, if
payment is not made, the documents are usually not released to the
buyer for pick-up.
CHAIRMAN ROKEBERG indicated he thought that explained it, noting
most small businesses didn't work with that. He asked if Ms.
Little had read the entire bill.
Number 0961
MS. LITTLE answered in the affirmative, commenting she did not
understand everything because she was not an attorney.
CHAIRMAN ROKEBERG asked if adoption of the updated UCC article [UCC
Article 5] would make her life easier or more difficult in dealing
with other financial institutions.
MS. LITTLE replied she thought it would be fine.
CHAIRMAN ROKEBERG referred to some controversy or questions he
recalled from last year about the timing of certain things,
mentioning the "float" issues. He questioned whether the bill
contained certain time limits or something giving direction on
that.
Number 1015
MS. LITTLE replied she believed the previous discussion was
concerning when documents were presented: only so many days were
given to review those documents to determine any discrepancies, or
if the documents could be honored as presented. The "UCP" laws, or
the International Chamber of Commerce (ICC) laws, indicate a bank
is given seven days to examine these documents. She indicated she
believed there had been amendment to the previous bill stating the
"UCCs" would allow three days. Ms. Little confirmed she believed
the amendment had not passed.
CHAIRMAN ROKEBERG commented it might seem like a long time for a
bank to have potential access or use of those funds, asking what
happened as a practical matter.
Number 1075
MS. LITTLE replied the documents came into a bank and were
prioritized. As documents come in, the bank, as an issuer, wants
to have time to review the documents thoroughly because if there
are discrepancies and the issuer pays, the issuing bank becomes
liable for that payment. She stated the seven days allowed the
bank time to receive and review the documents. The bank attempts
to get out-of-order items corrected by having the account party
approve payment, prior to the bank saying it will not honor.
Number 1133
REPRESENTATIVE HALCRO noted page 7, lines 7 through 9 gave the only
definition he could find of any time frame ["(b) 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, ..."] except as provided in lines 15 through
18 ["(c) Except as otherwise provided in (d) of this section, an
issuer is precluded from asserting a discrepancy as a basis for
dishonor if (1) timely notice is not given; or ..."]. He confirmed
from the chairman that timely notice would be the seven days.
Number 1175
CHAIRMAN ROKEBERG added he thought there were some practical
considerations because it had to be ensured that all the documents
were in hand. He indicated dealing with transactions across the
International Date Line would also cause the automatic loss of a
day, and that similar factors could affect the situation. The
chairman further indicated the time line issue had been looked into
very thoroughly last year, even by outside counsel, and there was
general agreement that time line was acceptable. Chairman Rokeberg
confirmed no one else wished to testify on HB 79, stating he would
like to hold the public hearing over because he felt some input was
needed from the uniform law commissioners, and a level of comfort
was needed from the committee members and others present, before
the bill was moved.
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