Legislature(1997 - 1998)
10/20/1997 01:09 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE October 20, 1997 1:09 p.m. Anchorage, Alaska MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery, Vice Chairman Representative Joe Ryan MEMBERS ABSENT Representative Bill Hudson Representative Jerry Sanders Representative Tom Brice Representative Gene Kubina COMMITTEE CALENDAR HOUSE BILL NO. 178 "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." - HEARD AND HELD SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 142 "An Act relating to the sale or transfer of new or used motor vehicles; relating to the confidentiality of certain information related to attorney general investigations of unlawful trade practices and antitrust activities; establishing additional unlawful trade practices; relating to the exemptions from telephonic solicitation regulation; regulating the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 178 SHORT TITLE: UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT SPONSOR(S): LABOR & COMMERCE BY REQUEST JRN-DATE JRN-PG ACTION 03/06/97 561 (H) READ THE FIRST TIME - REFERRAL(S) 03/06/97 561 (H) LABOR & COMMERCE 03/14/97 (H) L&C AT 3:15 PM CAPITOL 17 03/14/97 (H) MINUTE(L&C) 04/25/97 (H) L&C AT 3:15 PM CAPITOL 17 04/25/97 (H) MINUTE(L&C) 05/02/97 (H) L&C AT 3:15 PM CAPITOL 17 05/02/97 (H) MINUTE(L&C) 05/05/97 (H) L&C AT 3:15 PM CAPITOL 17 05/05/97 (H) MINUTE(L&C) 10/15/97 (H) L&C AT 1:00 PM ANCHORAGE LIO 10/15/97 (H) MINUTE(L&C) 10/20/97 (H) L&C AT 1:00 PM ANCHORAGE LIO BILL: HB 142 SHORT TITLE: BUSINESS PRACTICE REGULATIONS SPONSOR(S): REPRESENTATIVE(S) DAVIS, Croft JRN-DATE JRN-PG ACTION 02/17/97 374 (H) READ THE FIRST TIME - REFERRAL(S) 02/17/97 374 (H) L&C, JUDICIARY 02/19/97 408 (H) COSPONSOR(S): CROFT 04/08/97 1025 (H) SPONSOR SUBSTITUTE INTRODUCED-REFERRALS 04/08/97 1025 (H) LABOR & COMMERCE, JUDICIARY 05/02/97 (H) L&C AT 3:15 PM CAPITOL 17 05/02/97 (H) MINUTE(L&C) 05/05/97 (H) L&C AT 3:15 PM CAPITOL 17 05/05/97 (H) MINUTE(L&C) 10/15/97 (H) L&C AT 1:00 PM ANCHORAGE LIO 10/15/97 (H) MINUTE(L&C) 10/20/97 (H) L&C AT 1:00 PM ANCHORAGE LIO WITNESS REGISTER JERRY K. WEAVER, Senior Vice President and Commercial Loan Manager National Bank of Alaska; Secretary/Treasurer Alaska Bankers Association 300 West Northern Lights Boulevard Anchorage, Alaska 99503 Telephone: (907) 265-2920 POSITION STATEMENT: Provided testimony on HB 178. MELODY LITTLE, Officer Letters of Credit International Department National Bank of Alaska 300 West Northern Lights Boulevard Anchorage, Alaska 99503 Telephone: (907) 265-2920 POSITION STATEMENT: Provided testimony on HB 178. L. S. "JERRY" KURTZ, JR., Member Alaska Uniform Law Commission 1050 Beech Lane Anchorage, Alaska 99501 Telephone: (907) 258-6051 POSITION STATEMENT: Provided testimony on HB 178. ART PETERSON Uniform Law Commissioner Alaska Uniform Law Commission 350 North Franklin Juneau, Alaska 99801 Telephone: (907) 586-4000 POSITION STATEMENT: Provided testimony on HB 178. REPRESENTATIVE GARY DAVIS Alaska State Legislature 145 Main Street Loop, Suite 223 Kenai, Alaska 99611 Telephone: (907) 283-7095 POSITION STATEMENT: Sponsor of SSHB 142. RICHARD MORRISON, Owner Eero Volkswagon/Saturn of Anchorage; Former President/Current Member, Alaska Auto Dealers Association 935 Gambell Anchorage, Alaska 99511 Telephone: (907) 272-5522 POSITION STATEMENT: Testified on SSHB 142. DAVEED SCHWARTZ, Assistant Attorney General Commercial Section Civil Division Department of Law 1031 West Fourth Avenue, Suite 200 Anchorage, Alaska 99501-1994 Telephone: (907) 269-5100 POSITION STATEMENT: Answered questions regarding SSHB 142. MICHAEL STEPP, President Stepp Brothers Lincoln Mercury/BMW; Board Member, Alaska Auto Dealers Association 730 East Fifth Avenue Anchorage, Alaska 99501 Telephone: (907) 257-6600 POSITION STATEMENT: Testified on SSHB 142. JUANITA HENSLEY, Chief Driver Services Division of Motor Vehicles Department of Administration P.O. Box 20020 Juneau, Alaska 99811-0020 Telephone: (907) 465-4361 POSITION STATEMENT: Answered questions on SSHB 142. ACTION NARRATIVE TAPE 97-63, SIDE A Number 0119 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee to order at 1:09 p.m. Members present at the call to order were Representatives Rokeberg, Ryan and Cowdery. HB 178 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT Number 0133 CHAIRMAN ROKEBERG indicated the committee would hear HB 178, "An Act relating to letters of credit under the Uniform Commercial Code; and providing for an effective date." Number 0228 JERRY K. WEAVER, Senior Vice President and Commercial Loan Manager National Bank of Alaska; Secretary/Treasurer Alaska Bankers Association, came before the committee to give testimony on HB 178. He noted the Alaska Bankers Association represents all the banks in Alaska. Mr. Weaver explained the banking industry, through the Alaska Bankers Association and other banking associations, nationwide, and the uniform code commissioners, have been working for years in making small technical revisions to the Uniform Commercial Code (UCC). He stated HB 178, which would revise letters of credit, is one of the technical steps. Letters of credit are a fairly sophisticated instrument used primarily in foreign trade. He said there are some very technical steps in which HB 178 makes some slight revisions. The Alaska Bankers Association and the National Bank of Alaska highly endorses HB 178. Mr. Weaver said the proposed amendments would deviate from the UCC's common approach of trying to tie all 52 of the various UCC districts together. He said because this would present some problems and would have Alaska stand out as being different in its code and how it approaches letters of credit, he would recommend the proposed amendments be removed from HB 178, as it is currently presented. Number 0435 CHAIRMAN ROKEBERG asked Mr. Weaver to review how the letters of credit work and the issue that revolves around the amendments as it relates to the float period. MR. WEAVER informed the committee members that letters of credit are document issues. He said, "Basically what it said in very essence terms, it's a guarantee of a credit grantor or someone you know, a bank usually because you can verify their credit ratings and financial statements fairly easy, worldwide, -- and that's why banks typically end up as issuers of letters of credits. The transactions are document issues. When a letter of credit is issued, basically it has a number of other documents that will go with it when it's presented for payment. An example we were using earlier would consists let's say a load of forest products coming out of here - a load of round logs. If they were to go, typically what would be with them, of course, would be an invoice billing for the amount of the logs. If one of our - let's assume a Native corporation was shipping logs overseas to Japan, Taiwan, some place like this. So a bill of lading, which is a negotiable instrument you have to have to get the logs off the ship and take title to them, usually some sort of scaling permit or so forth, that would rate the quality and the quantity of material that's in there -- how many board feet and so forth. This would be done by an independent agent who would have been verified by both the buyer and seller. Usually these are rated much like an appraiser or something of this nature. And probably then the insurance that would say, `Okay, if something happens to the ship after it leaves, and so forth, who gets paid on what terms, if for some reason the logs never make the destination.' Those documents are put with the letter of credit and the letter of credit outlines which documents are required and so forth, and sent the beneficiaries bank on the other side who takes a look at the documents, matches them to the letter of credit. And when they totally match up, then they authorize payment. The funds then are wired three (indisc.), once all the documents all the documents are approved and the transaction happens. Meantime, the ship is hopefully sailing across the Pacific on its way to deliver the actual cargo." Mr. Weaver informed the committee that this happens with many of the natural resources that Alaska exports. He said the reason there is a time period is because quite frequently, for whatever reason, the documents may not exactly match up. This just allows a uniform time period for the parties to try and make sure those documents match and that the buyer and seller are actually getting the transaction that they really wanted instead of just dealing with the documents as they are. Mr. Weaver said and example is the log scale may not quite match the shipment that was called for in the letter of credit, and it probably allows for partial shipments, et cetera. Mr. Weaver pointed out that the time period that is allowed in the UCC revisions is basically just for that purpose and it doesn't effect money because the money isn't going to be transferred until the actual letter of credit is approved. After approval, the funds are then wired. He noted the transactions are usually large dollar transactions with a fairly small number of players. Number 0820 CHAIRMAN ROKEBERG referred to there being a wire transfer of funds and said that would come under the regulations. MR. WEAVER explained that wire fund transfers are absolute. Basically, the wire is knowledge that says, "Hey, move the money from account A to account D." He pointed out that the players of transactions he is talking about aren't going to stand for much float. Banks want immediate and prompt payment. Mr. Weaver referred to the document period and said it has to do with documents and letters of credit are all about documents. Number 0922 CHAIRMAN ROKEBERG referred to the transfer of logs and said there wouldn't be an actual transfer of funds until the receiving party receives the logs and they are satisfied with the product. MR. WEAVER said that is incorrect. He said in this case, it would relate solely to the documents and not to the logs. The logs are out in the middle of the Pacific. Mr. Weaver said, "The payment would match -- hey, the scale report is in here, the insurance is here, the bill of lading is here and an invoice for $1,231,000 which was the amount that's required. And there is usually a draft, the equivalent demand check that says, `pay this.' Then once they've checked those off to the letter of credit and the letter of credit basically issued by let's say in this case, the National or well I guess it's going to be the Bank of Tokyo in this case. It says, `We will pay $1,231,000 when we receive each of these documents.'" Mr. Weaver explained that if there was an error on one of the documents that doesn't quite match the buyers needs -- it isn't $1,231,000, it's only $1,014,000 and it wasn't quite the quantity of spruce as they threw a little pine in. He said it would simply be because probably the buyer and the seller had been negotiating on the phone and that's what they agreed to do. The documents would be a little different, so NBA would wire the Bank of Tokyo and say, "The transaction is a little different, this is what occurred. Does your buyer approve?" The bank would then call the buyer and ask for approval. As soon as the buyer agrees, then the funds are wired. It is a direct transfer of money. Number 1122 CHAIRMAN ROKEBERG to the possibility of there being a problem where the seller thinks everything is in order and the buyer still isn't releasing the funds. He asked how that would be handled. MR. WEAVER said Mr. Kurtz will discuss how they arbitrate the distribution. He noted that is basically what the bill is about. He said it is a very close-knit little club, worldwide, and you won't be playing very long if you don't honor without some really legitimate complaint as to why you shouldn't make the payment because the merchandise is already gone. Number 1207 CHAIRMAN ROKEBERG questioned what the level of commerce does the state of Alaska have in terms of utilizing letters of credit. MR. WEAVER said as trade gets established and the buyer and seller get to know each other, they frequently go to open accounts. That currently occurs with many of the big trading companies. Mr. Weaver pointed out that currently, NBA has about $16 million outstanding on letters of credit. Mr. Weaver said it is his guess that trade in Alaska probably doesn't exceed $200 million a year in using letters of credit. He said, "Now obviously, if you go to peak time during - and that would be fishing season because a lot of the fish orders go out this way, those are -- remember I mentioned the log scaler -- and as you'll remember in many of the fishing plants, the Japanese trading companies bring their own employees over to grade the product right on the spot. And what they're preparing are the documents that will go with that letter of credit that says, `Yes, we got what we bought. There were so many silvers, this fresh, this caught.' Your employee kind of say that that's exactly what went on that ship in that container. And then once those documents get there and they will far beat the ship - the ship may take five days to make the trip, the documents are going to do it in a day, then they will wire payment." Number 1341 REPRESENTATIVE JOE RYAN said, "I talked to you and I've told the chairman that if I feel that my concerns were perhaps can be satisfied that I'd be happy to withdraw the amendment. Say, for instance, that I broker a deal not to (indisc.) for fish, lumber, petroleum products, refined or otherwise, and I want the letter of credit assigned to another person because I'm going to use that assign to settle a previous debt. Is there going to be a problem under this?" Number 1418 MR. WEAVER introduced Melody Little and explained she is a letter of credit officer with NBA. Number 1435 MELODY LITTLE, Officer, Letters of Credit, International Department, National Bank of Alaska, came before the committee and introduced herself. REPRESENTATIVE RYAN said he wants to be assured that somebody isn't sitting on somebody's money, either keeping the float and/or offering a banker's acceptance in lieu of the actual cash that is deliverable. When an opportunity arises for a person to make money, from time to time they take advantage of those opportunities. A lot of people who are dealing in these kinds of transactions are hung out and time value of money is very important. Representative Ryan said, "Sitting seven days -- someone's wire transfers already has already been made can be the difference in the profit and the transaction that the person has tied up. So in effect, if the bank does hold them up seven days that particular amount of money would be what the profit would be and all that work was done for nothing. I want to ensure that this particular piece of legislation, the way I read it, it looked like there was opportunity for that to happen. And if you can convince me that I'm wrong, I'd be more than happy to say fine, (indisc.)." Number 1552 MS. LITTLE asked Representative Ryan if he is asking about the seven days or the assignment. REPRESENTATIVE RYAN said, "Let's say for instance I want to assign this letter of credit to another party to satisfy some business arrangement I have. Is there going to be any problem on assignment?" Number 1608 MS. LITTLE said she believes he is talking about the assignment of proceeds and not the assignment of the performance. In that instance, they wouldn't consider it an assignment. It would be considered a transfer. At that point, Representative Ryan would transfer a portion of his letter of credit, whatever amount the actual sale is between the broker and the actual supplier. Ms. Little said the supplier would then prepare the documentation and give it to the person who is brokering it. That person would then give it to their bank to look at for negotiating. At that point, the negotiating bank would compare the documentation. If everything was in compliance, they would send them to the issuing bank. The issuing bank then looks at the documentation and determines whether they are going to pay and they're obligated to pay. If there are any discrepancies in those documents, the issuing bank would notify the broker's bank to inform them there is a problem. At that point, they try to resolve the situation. Ms. Little referred to a delay in payment and said it would only be do to the dispute of the documents. It is not going to be the actual payment of the sale. Number 1724 REPRESENTATIVE RYAN said the (indisc.) will not take place before the dispute is settled. MS. LITTLE indicated that is correct. Number 1733 REPRESENTATIVE RYAN said, "I want to ensure that flexibility is going to be there and that there is not going to be a disruption on the payment because otherwise it would be a very interesting business to find a reason why we haven't received the money and upheld to offer you a banker's acceptance that will take the risk for a point and a half or whatever. There are times when these things are -- people want to take advantage of that. They're willing to pay the fee to get the money now so they can go on to something else. I don't want this to be an opportunity where that would happen because we're talking about a lot of money when we start dealing in large commodities." Number 1852 MS. LITTLE said she believes Representative Ryan is referring to the seven-day period. She explained what the seven-day period basically says is once the issuing bank has received the documents, they have to set priority in their work flow. The seven days allows the bank to prioritize it into their workload. If there are problems, the bank usually tries to go to the actual person that owes the money and tries to resolve the situation before they decline payment. She said she thinks that why the seven-day period is given rather than a three-day period as it allows resolution before declining payment. REPRESENTATIVE RYAN asked what happens when the buyer declines a shipment or says that the shipment isn't as (indisc.). He asked what period of time is on that end. Number 1959 MS. LITTLE said the buyer doesn't have a chance to look at the goods before they receive them. The reason is that usually in a letter of credit, the bill of lading is consigned either to the bank or to the order of shipper and then blank endorsed. What that does is it makes the bill of lading negotiable and whoever holds it is the only one that can pick up the goods. REPRESENTATIVE RYAN said he wants to ensure that the bill won't slow something down in facilitating commerce. MS. LITTLE referred to the seven-day time period and said she doesn't think every bank waits for seven days to look at the document. They want to allow for the prioritizing of it and if there are problems to resolve, they can be resolved before denying payment. REPRESENTATIVE RYAN referred to a letter from the Office of the Attorney General the committee members had in their committee file and said the letter talks about an institution finding a discrepancy the first day, but waits until the seventh day to bring it to the person's attention for it to be cured. Number 2304 MR. WEAVER referred to a comment made by Representative Ryan regarding the shipment and said a letter of credit is involved in an issue of documents and not the actual shipment. The letter of credit will be paid if the documents are correct, even if the shipment is not. He said if there is a load of bananas and they rotted during shipment, it would become an insurance claim and it would have nothing to do with the documents and the letter of credit. The letter of credit is an enforceable document. Mr. Weaver stated that because you're dealing with two banks that have very strong reputations on the line, they're going to be very careful as to how they treat that transaction because in most cases, banks also have loans to the various parties that are involved. Number 2406 REPRESENTATIVE JOHN COWDERY referred to the seven-day period and asked how it compares with other places like Los Angeles, San Francisco and Seattle. MR. WEAVER said it is a uniform standard that is the same in all 52 districts. It is actually worldwide and the Europeans would do exactly the same. Number 2513 L. S. "JERRY" KURTZ, JR., Member, Alaska Uniform Law Commission, came before the committee. He referred to the seven-day time period and said the period really isn't seven days. He said code 5-108 says that an issuer has a reasonable time after presentation, but not beyond the end of the seventh business day. It is drawn that way with reasonable time first because there are a lot of transactions where banks don't need seven days to process the documents. One of the official comments that the drafters of the code mentioned was that a mining transaction, where you're just dealing with mining output, is a good a good example where seven days usually isn't needed. Mr. Kurtz said "reasonable" can always be stretched, but at least that section puts some additional pressure on things. He noted it has been his experience that most banks do respond faster than seven days. He said with a mine (indisc.) standby letter of credit, technically your time would be less than seven days. Most of the problems in this area come up when the documents that are received don't fit the letters of credit. He noted that litigation in this area has been very scarce and he isn't aware of any in the state of Alaska over the 30 years that he has been practicing law. He noted it is because the issuing bank and the banks on the other end tend to push very hard work these things out. They don't want to go to court. Number 2852 ART PETERSON, Uniform Law Commissioner, Alaska Uniform Law Commission, testified via teleconference from Juneau. He referred to amendments proposed by Representative Ryan and said they would really do some damage to the bill and to uniformity. One of the main features of the UCC is that it has been adopted in all U.S. jurisdictions with the partial exception of Louisiana which is different, in a number of respects, from all of the other states. In addition, the UCC has set an international standard and many of its provisions coincide with the international standards of practice. For Alaska to adopt some of the unique provisions in Representative Ryan's set of amendments, it would really put Alaska in a bad situation for doing letters of credit business. Mr. Peterson said, "Mr. Weaver commented on the amount that his bank does in a typical year in this field and estimated that maybe there are a couple hundred million, statewide, involving the other banks in Alaska. One figure that I've had is that in the United States, as a whole, it's a two hundred billion dollar industry and Alaska certainly doesn't want to be viewed as off on it's own little twig - there is not even much of a limb to stand on, but I don't think we want to do that. And certainly the uniform law commissioners would oppose those amendments." Number 3056 MR. PETERSON said it is his understanding that the Department of Law also opposes Representative Ryan's amendments and noted there was a letter submitted to Representative Rokeberg, in the spring, written by Doug Lottridge, a former assistant general, regarding the opposition of the amendments. Mr. Peterson said he believes the Division of Banking, Department of Commerce and Economic Development, also doesn't support the amendments. He noted he cannot speak for them and hasn't been authorized to speak for them. Mr. Peterson urged the committee members to move the bill, without the amendments, with "do pass" recommendations. REPRESENTATIVE RYAN asked Mr. Peterson a question which was indiscernible on the tape. Number 3419 MR. PETERSON indicated he didn't hear Representative Ryan's question very clear, but said he believes Representative Ryan is concerned about the time period that Mr. Weaver and Mr. Kurtz have addressed. Mr. Peterson said he would emphasize that it is a reasonable time or seven days. He said, "If a reasonable time is one day, that is the amount of time that -- that is all that's allowed and that's the international standard. If a reasonable time is six days, it's six days. If a reasonable time is 82 days, well they're still stuck with 7. So the bill looks like it's written as tightly as can be while recognizing all of the procedures involved and all of the international practice that we're trying to address here." He indicated he wasn't sure if he answered Representative Ryan's question. Number 3547 REPRESENTATIVE RYAN stated that he thinks his concerns have been addressed and would contact Mr. Peterson regarding another issue. Number 3631 CHAIRMAN ROKEBERG closed the public hearing on HB 178. He said it is his intention to bring the bill back before the committee when the committee reconvenes during the legislative session. SSHB 142 - BUSINESS PRACTICE REGULATIONS TAPE 97-63, SIDE B Number 0129 CHAIRMAN ROKEBERG indicated the committee would address SSHB 142, "An Act relating to the sale or transfer of new or used motor vehicles; relating to the confidentiality of certain information related to attorney general investigations of unlawful trade practices and antitrust activities; establishing additional unlawful trade practices; relating to the exemptions from telephonic solicitation regulation; regulating the sale of business opportunities; amending Rules 4 and 73, Alaska Rules of Civil Procedure; and providing for an effective date," sponsored by Representative Gary Davis. Chairman Rokeberg noted the last Labor and Commerce Committee hearing on the legislation was on May 5, 1997. Number 0130 REPRESENTATIVE GARY DAVIS explained SSHB 142 via teleconference from Soldotna. He stated that at the last hearing on SSHB 142, most of the debate centered around the sections relating to the selling of new and used motor vehicles, and some of the disclosures required to minimize fraudulent sales if there has been damage to a vehicle or if there are known problems with a vehicle. Representative Davis noted those sections are in the first five pages of the legislation. Representative Davis stated that the rest of the bill, which is rather lengthy, has had little debate and covers some loose ends that Daveed Schwartz from Office of the Attorney General, brought up. Representative Davis noted Mr. Schwartz deals specifically with consumer affairs issues. REPRESENTATIVE DAVIS stated he introduced the legislation at the request of Mr. Schwartz and Crystal Smith, Legal Administrator, Office of the Attorney General. He explained that some of the inclusions seemed quite practical as there is a need for clarification in statute. He reiterated that the sections dealing with new and used motor vehicles have had the most discussion, input and the most objections as the Alaska Auto Dealers Association has been vocal in objecting to anything that subjects them to more requirements of disclosure. CHAIRMAN ROKEBERG stated he hasn't had any direct dealings with anybody from the industry other than at the previous meeting on SSHB 142. REPRESENTATIVE COWDERY informed the committee he didn't think he was at the last hearing on the measure. Number 0957 RICHARD MORRISON, Owner, Eero Volkswagon/Saturn of Anchorage; Former President/Current Member, Alaska Auto Dealers Association, came before the committee to testify. He explained the overall difficulty he sees with the bill is that it combines some issues that are very complex and with some issues that are very simple. The automotive and disclosure issues are very complex and there are a lot of considerations that need to be made. Mr. Morrison said that because of the complexity of the automotive issues, he wrote a letter to Representative Davis on March 19, 1997, that suggested that they get together and try to deal with some specifics in disclosure laws and other laws. He referred to Representative Davis' comments about the Alaska Auto Dealers Association not being interested in making any kind of compromise or change and said in the letter it states that they do see some need for some laws and things that need to be clarified. Mr. Morrison said automobile dealers are very interested in trying to get a handle on what the playing field is. He said several years ago when the Inspection and Maintenance Program (I/M) law went into practice, there was very little information that was provided to the auto dealers. Most of the auto dealers found out that they were violating the statutes on reselling vehicles before they even knew what was going on. He noted that was when the Alaska Auto Dealers Association was being formed. The association was formed, an educational process was started and they were able to eliminate most of the complaints. Mr. Morrison indicated that the Alaska Auto Dealers Association represents almost 100 percent of the new auto dealers in the state with exception of one or two dealers in outlying areas. He referred to independent auto dealers and said the association represents a major share of a larger group of them. Number 1309 MR. MORRISON referred to the I/M problem and said he discussed it with the Better Business Bureau. He informed the committee members he asked the bureau how many issues they have had complaints about regarding I/M difficulties or cars sold without the I/M being done. The response was that they used to see a lot of complaints, but they aren't seeing very many anymore. He asked the lady that he spoke with to give him some kind of an idea. The lady responded that she had been working there for about eight months and maybe it's three, maybe it's five. He indicated there is a huge number of autos being sold in the state, in excess of 78,000 cars a year. If there has been five complaints, why would a law need to be enacted that would effect a lot of people who are concerned about their customers and are concerned about doing their business right. He said, "Lets focus on the one or two that are not doing it and do some legislation that goes after this and I believe that under the current state law or current trade practice, that there is the issues in order to be able to deal with that currently in the books." Number 1435 MR. MORRISON pointed out that about 45 percent of the vehicles that are sold in the state are used and are sold by auto dealers. The balance of used vehicles are sold by private individuals. Mr. Morrison said he believes the bigger issue comes from the private individuals. There are a lot of business people that have an ongoing business, are interested in building their business, and want to keep it growing. They aren't going to do that by taking advantage of customers. He said if he is going to invest in his business and he has a customer that goes away unhappy because he didn't take care of an I/M certificate or a problem (indisc.), he isn't going to be in business very long. Business is too competitive and too difficult. Mr. Morrison said he works very hard in his business to maintain a good reputation. He suggested going after the few dealers that are causing the problem and to not regulate the many businesses that are trying to do things right. Number 1600 MR. MORRISON referred to used cars that may be added to his inventory and said they try very hard to do an I/M test before those cars are shown. He said many of the dealers in the association try to do the same thing. The independent dealers in the association have even gone as far as changing the style of the vehicles that they're selling so that they are not selling the older, higher mileage, tired vehicles. Number 1717 REPRESENTATIVE COWDERY asked how the law would effect anything that Mr. Morrison wholesales or sells at an auction. MR. MORRISON explained that there are a lot of cars that come in that are in such a condition that he wouldn't want to be associated with them. So they'll have a wholesaler come in to bid on cars or the wholesaler will go to an auction and bid on them. He stated he doesn't know how the legislation will impact that kind of a situation. Mr. Morrison said he doesn't believe that the bill would impact the people who are buying the vehicles from dealers at wholesale prices. He said he thinks it would impact the wholesaler as they got ready to sell the cars on a retail basis. MR. MORRISON referred to a difficulty with the I/M testing and said, "You get somebody who lives in Wasilla, commuting back and forth to town. There is over 3,000 people a day doing that (indisc.) I/M test. So now they're going to sell their car or they're going to trade their car in. Chances are the greatest selection is in Anchorage, they're going to come into Anchorage to do that. That car has not had an I/M test in several years. Now what do you do with that customer with that car?" He noted Kenai is the same way. Mr. Morrison referred I/M testing and said if the auto dealers are already testing before they sell them, he would suggest doing something to go after those people that are selling those cars under existing laws, to make them do their I/M testing or to stand up to (indisc.). He said he doesn't believe there is a need for an additional law. Number 1931 REPRESENTATIVE RYAN said many years ago he sold some automobiles and it was a common practice at that time that most of the productive salesmen would go back through records of people who had previously purchased the vehicles from the dealership. They would call the previous owners and ask them how the car was. He asked if that is still a common practice. Number 1957 MR. MORRISON indicated that is still a common practice. REPRESENTATIVE RYAN asked if the telephone solicitation would have adverse impact. MR. MORRISON said he didn't know how to answer that question. REPRESENTATIVE RYAN referred to consumer protection laws and asked if it is not incumbent upon the buyer to show some due diligence. He said, "For instance, I wanted to purchase a used car from you and I came. Could I say that I would like to take this to another place and pay for an inspection? Would that be acceptable in your business practice?" MR. MORRISON responded that it would not only be acceptable, but it would be encouraged. He noted that his particular store offers, on any used car that is bought from them, three days to return. That means if somebody bought a car from him today, for any reason within the next two and half days if they decided they didn't want that car, they could return it back to his store. He noted there are many dealers in the Anchorage area that are doing the same thing. Mr. Morrison said the legislature can pass all kinds of rules, regulations and legislation, but you can't regulate people from being stupid. If people are going to buy something without investigating and looking at it, no matter how many laws are on the books, it won't change things. People need to be aware and have to realize they have got to take care of themselves. Number 2229 MR. MORRISON explained that this issue is so large, it really needs to be separated. He referred to the issue of damage disclosure and said, "We acknowledge and had conversation - I personally discussed this with Mr. Schwartz several times on a new car issue. Right now, under Alaska statute, there is no definition of how much damage or how much repair is acceptable on a new car damage. Right now, if you were to replace a bolt or put a license plate frame on a car, technically by state law, you're supposed to disclose that to the customer, because it says if there is any alterations from the time it was new or delivered to you, those should be disclosed. Well, in most states, a process has been adopted at percentage of the price of the car or a flat dollar amount that if the car has had $500 or $1,000 damage to it, then that should be disclosed to the individual. But a simple example of a case that can happen is you can have a car that comes in that has a broken front grill. The grill is a plastic item to be unbolted. A (indisc.) taken out of the box put it back on the car - bolt it back on. It's a factory original part. Under state law, (indisc.) does not effect the value of the car, it doesn't effect the resale value, it doesn't effect the appearance of the car and it is all factory parts. By state law today, you must disclose that, but the car was repaired without any way of damage harming the car from what its original shape or condition was and it doesn't make any difference. Now if there is damage to the car that requires a substantial amount of repair, we agree there needs to be some definition as to what that value is and we're suggesting that there either be a percentage of the price or a flat dollar amount much like most of the other states have adopted." Number 2429 CHAIRMAN ROKEBERG said it might be helpful for the committee if the Alaska Auto Dealers Association would be more specific in its recommendations and if they would provide the recommendations in writing. He said maybe a dollar amount might work. Number 2520 MR. MORRISON said the difficulty of a dollar amount is as things change, what was serious damage ten years ago might have been $500, but today that same damage would probably cost $2,000 to $3,000. The difficulty with a flat dollar amount is there has to be some way to up date it as time goes by and things change. MR. MORRISON said he believes there needs to be something regarding new cars and it should be defined for both the consumer and the auto dealers. MR. MORRISON referred to the subject of used cars and said it is a very, very complex issue. He said, "If we're going to do a disclosure on used cars and if 55 percent of all the used cars sold are sold by private individuals, why would we section out just the automotive dealers?" He said the National Automobile Dealers Association (NADA) has been trying for years to lobby to get a national title branding process set up. One of the issues on used cars, which has gotten a few dealers in trouble, is an insurance company will total a car. They'll sell that car to the best bidder. Someone will buy the car and fix it poorly and then put it back on the market to sell it to a consumer. The consumer drives the car for a little while and then sells it. By the time the car is sold to the fourth person, they take it into an auto dealer. The dealer inspects the car and everything appears to be fine. They then put it out for sale and it's sold. The person who buys the car from the dealer then somehow finds out that the car had been totaled and the title had never been marked totaled, branded or reconstructed. He noted that there is a section on the DMV registration or the title that put "Rec." which means that it was reconstructed. Mr. Morrison said DMV has been working with the auto dealers in an attempt to correct the problem. He said if the registration could be branded so that it says in big bold letters "RECONSTRUCTED," it would eliminate a lot of problems. He said he believes there is currently a law where insurance companies are to notify the state when a vehicle is totaled. The title is supposed to be changed to state that it was a totaled vehicle; however, in many cases that doesn't happen. Number 3017 MR. MORRISON pointed out another problem is with damage disclosure. He said their point on damaged and used cars is not a matter of whether the car was damaged and repaired, it is a matter of whether the car was repaired properly. If the car was repaired properly, there is no reason for disclosure because the was set up (indisc.). He noted that probably 90 percent of all the cars on the market have had some kind of damage. Mr. Morrison said, "And then how are you going to define the damage? Are you talking about just automotive accident damage or are you talking about -- what if the shocks wore out because he was driving on a rough road? Is that damage also? At what point are you going to break the damage on it? And then are we going to start requiring people to keep a log like they do on aircrafts and pass on this log to the next person that's come in here?" Number 3136 MR. MORRISON referred to the issue of whether automobile dealers are supposed to disclose things that they know are defects on the car. There is already a law, under the Fair Trade Act, that says if there are known defects, the dealer is supposed to disclose them. Mr. Morrison said he would submit that the automobile dealers in the association are very good about trying to get that straightened out. He pointed out that there has been one case against one automotive dealer in Anchorage and he believes 90 percent of the bill is built around that one case. Mr. Morrison stated he doesn't think there is the need for an additional law and additional regulations because of one case. Number 3229 CHAIRMAN ROKEBERG pointed out he has a constituent that went through the damage, reconstruction and failure to have the vehicle properly registered and it wasn't through the dealer Mr. Morrison was speaking of. He said, "To try and narrow it to say that this problem is only an isolated incident -- I think it would be very unusual, but not necessarily your one case, I'd put you on notice there." Number 3253 MR. MORRISON said the association agrees that there needs to be something in regulation, but it shouldn't be focused just to the auto dealers. It should be focused statewide. CHAIRMAN ROKEBERG said in that particular instance, his constituent recovered from the state of Alaska for failure to have the proper registration in the case. Number 3316 REPRESENTATIVE RYAN asked where this falls in under the agreement to purchase an automobile as is, where is. He noted that is done quite a bit. Representative Ryan referred to when a person goes to a financial institution that has repossessed a car and wants to buy it, the financial institution will say they can buy it where is and as is. He asked how that issue is to be resolved. MR. MORRISON explained that the association had Charlie Cole conduct a study regarding the as is, where is. He studied the Magnuson Loss Act, which is done nationally, and also local cases. One of the difficulties with the as is, where is, is that you remove a vehicle out of the as is, where is, if you sell a service contract with that vehicle. Mr. Morrison said there was also a lot of discussion and debate as to whether a service contract was an insurance policy or a not an insurance policy and what it did and didn't imply. He said through the interpretation the association has is that they believe that if a service contract is sold, then there are additional implied warranties to go with that. However, if Chairman Rokeberg were to come in and buy a car from him today, and he sold it to him as is, where is, he also must supply a certificate of compliance or a certificate of noncompliance or the I/M test. A certificate of compliance is the I/M certificate. There isn't a certificate of noncompliance, but it has been accepted that the certificate of noncompliance is the certificate that says that it is a title only waiver. That means that you have to pull the license plates off and you get a title only, but you don't get a registration and you don't get licensed by (indisc.). That is the other means for selling the vehicle without the I/M test being covered. So selling a vehicle as is, where is, really doesn't exist anymore as you still have to go through all the other hoops. Mr. Morrison said he has gone as far as putting a notice on his cars. If he has some cars that he is just going to wholesale, he puts a notice that says, "This is sold as salvage." He said he tries to get the point across that it is an old car. Number 3600 REPRESENTATIVE RYAN asked Mr. Morrison if he would be comfortable with an amendment to the statute that makes that a reasonable business practice. MR. MORRISON indicated he would be agreeable, but would like to see it and understand it first. Number 3613 CHAIRMAN ROKEBERG said he authored legislation, HB 222, which became law that allows dealers to sell salvaged vehicles without them having to have an I/M test. He noted it has to be for salvage purposes. Number 3719 REPRESENTATIVE RYAN said a dealer gets rid of a car to try to reduce the liability as a salvage, but the person who buys it turns around and wants to sell it as a used automobile. He said the chain of liability is his concern. The dealer made an honest effort to note that the vehicle was a salvaged vehicle, but the person who buys it comes back and says, "Oh, this was misrepresented and so forth, and I'm going to go to court." The lawyer comes right back up the line and says, "Well, we've got the most money so we're going to nail you." Representative Ryan said there should be an end to this kind of thing. He said maybe the legislation, with some changes, could establish that. Number 3808 CHAIRMAN ROKEBERG said he thinks it is really necessary to maintain the declaration on the registration and it should follow the vehicle as it protects everybody in the chain of title. Number 3824 MR. MORRISON said they had suggested at one time that rather than doing the registration style I/M certificate, they do a sticker for the (indisc.) which would do a whole bunch of things. One of the problems in Anchorage is that there are 3,000 people who drive in from the valley, a day, that are not driving I/M certified cars. He said if there was a sticker on the car, those cars could be identified. Number 3910 MR. MORRISON explained that they have been working on some recommendations for the committee that specifically addresses the new and used car disclosures. He said they are close to having them finalized. Mr. Morrison explained they have also invited Mr. Schwartz of the Office of the Attorney General to work with them, but they haven't been able to get together yet. He stated they are looking for ways to make things easier for the businesses and fair for the consumers. The issue is so complex that you just can't come in say, "Okay, you're going to disclose everything you know about that used car." It doesn't work and that is why no other state in the nation has adopted a used car disclosure law. There are a lot of ramifications to it. He indicated there is no simple solution. MR. MORRISON said one of the issues that was addressed in a previous hearing is there are cars being sold off the corner that appear they are being sold by private individuals, but they are really people selling as dealers. Mr. Morrison said there is a dealer licensing and bonding system in the state that really isn't being efficiently used. He stated the association would be in favor of having some kind of additional legislation or some kind of restriction on the people that are doing that. Mr. Morrison stated they want to work towards getting more reputable people that are in the business. He said the corner guy who sells out of his back yard doesn't help his business and by regulating the business in the way HB 142 talks about, it won't correct that guy. He will still continue to do what he is doing while appearing to be a private individual. Number 4136 CHAIRMAN ROKEBERG indicated the committee substitute addresses all the occupational licensing issues. He said Mr. Morrison indicated that there should be a dealer licensing law to act under. MR. MORRISON stated they have to have a dealer license and bond in order to be able to work with DMV. CHAIRMAN ROKEBERG said, "You don't have a regulatory and enforcement statutory capability within your organization, under state law, to administer any policing - if you will." Number 4225 MR. MORRISON indicated they don't. He said when there has been a problem, they have sat down with different members of their organization and said, "You're having a problem in this area, here's what you can do to straighten it out." Number 4242 REPRESENTATIVE RYAN questioned whether there is a minimum amount of automobile transactions. TAPE 97-64, SIDE A Number 0013 REPRESENTATIVE RYAN asked Mr. Morrison if there is a minimum amount of automobiles that he sells in a year that classifies him as a dealer versus a private individual. MR. MORRISON said he thinks it is five vehicles. REPRESENTATIVE RYAN asked how much this adversely effects reputable people who are established in the business. He noted the legislature ran into a similar problem with contractors - people who are licensed and bonded by the state versus people who are out soliciting door to door and don't meet the requirements of a contractor. He asked Mr. Morrison if it isn't a similar situation. Number 0118 MR. MORRISON said that is a tough question for him to answer. He said he would tell the committee members is they would find a lot of support from the Alaska Auto Dealers Association to minimize what he calls "street corner vendors." Mr. Morrison indicated the Alaska Auto Dealers Association would like to continue to work with the committee. He said they would like to have a separate bill that focuses specifically on this item. It doesn't make sense to regulate the many who are doing things right to try and catch the few who aren't when there are already existing laws to catch those few. He said, "I think there are also some national things that can come in so that we're not trying to create the wheel." Number 0314 CHAIRMAN ROKEBERG referred to Mr. Morrison saying that 55 percent of the sales are private sales and about 45 percent are dealer sales. He asked where those statistics are from. MR. MORRISON responded those are national statistics. CHAIRMAN ROKEBERG asked there are statistics for Alaska. MR. MORRISON responded, "The last time we tried to get the statistics through DMV, it was very difficult, but it appears to be by taking the total number of transactions that they have and the numbers that each of us dealers have combined together and saying, `Here's what we're selling,' it appears to very consistent." Number 0357 REPRESENTATIVE DAVIS said if his initial statements indicated there hasn't been any cooperation or any indication that the association acknowledges that there are some clarifications and interest in solving some of the problems, he apologizes. Representative Davis said, "My intent was to indicate that during some of the testimony, there has been some indication that -- from some automobile dealers, that there hasn't been a need that they're being pinpointed on specifically." Representative Davis said as Mr. Morrison indicated there definitely has been a lot of input by the association and they have been willing to work with him and the Office of the Attorney General on the legislation. After the bill was rewritten, there still has been an indication of concern. He said he is certain Mr. Schwartz is still willing to fine tune the legislation. Number 0613 DAVEED SCHWARTZ, Assistant Attorney General, Commercial Section, Civil Division, Department of Law, came before the committee. He said most of the discussion the committee has had deals with Sections 1 and 2, which deal with the I/M disclosure and the vehicle damage disclosure. MR. SCHWARTZ referred to Section 1, which deals with I/M disclosure, and said the current state of affairs (indisc.). He said in 1992, the legislature passed AS 45.45.400 which deals with the current obligation of persons engaged in the business of selling used vehicles in an auto emissions inspection area. Mr. Schwartz stated there are two auto emissions inspection areas in Alaska, Anchorage and Fairbanks. The 1992 legislation says that before a dealer can transfer title or ownership to a person who is going to use a used vehicle in an I/M area, the vehicle has to have a certificate of I/M compliance or noncompliance. The intent reflected by the legislative committee tapes and comments the prime sponsor at that time, Representative Loren Leman, was to ensure that the buyer, prior to sale, had information on the status the used vehicle concerning I/M, so that the buyer would know prior to sale what the I/M status was. The buyer could factor that information into their decision as to whether they want to buy the vehicle. Number 0825 MR. SCHWARTZ informed the committee that two problems developed with respect to the existing legislation which are in the form of complaints to the Office of the Attorney General or the Better Business Bureau or just general consumer questions in general was: 1. There was no requirement that the dealer actually present the information on the I/M status of the vehicle to the consumer prior to sale; and 2. The information didn't have to exist until a transfer of title which can occur up to 30 days after the actual sale, under the current DMV law. Mr. Schwartz said there were two problems with the current law. In 1996, the state attempted to address the problems by drafting Section 1. He noted Representative Davis was the chair of the House Transportation Committee at that time. Mr. Schwartz said Representative Kay Brown introduced HB 403 that contained Section 1 of HB 142, currently before the committee. That bill didn't pass. It was re-proposed and Representative Davis agreed to introduce it along with other items in HB 142. The idea was to give consumers information up front, prior to sale, about the I/M status of the vehicle. Number 1007 MR. SCHWARTZ said one thing to consider in evaluating the need for HB 142 is that the Consumer Protection Section of the Office of the Attorney General was essentially eradicated about ten years ago, except for one complaint mediator in Fairbanks, Jim Hayes, the current mayor of Fairbanks. Mr. Schwartz explained his office doesn't take individual complaints in consumer protection anymore. In the 1991 budget, Governor Hickel restored a modest amount of funding for litigation of the worst violations under the Consumer Protection Act, but they weren't given adequate funding to take individual complaints as they did before when they had a 16 person section, statewide. Mr. Schwartz said it's important to not judge the degree of a problem by the lack of complaints filed either at the Office of the Attorney General or by the Better Business Bureau. Mr. Schwartz said that do the confusion that the 1992 legislation currently presents, he doesn't think consumers often know enough to realize that they might have something to complain about concerning I/M. He said he has been told that the Municipality of Anchorage I/M Office receives, on average over a year's time, approximately ten complaints a month concerning vehicles that people have purchased where they only find out after sale that the vehicle doesn't pass I/M. Often times, the vehicles are purchased from a dealer and not necessarily from an individual in a private transaction. He stated that is the goal of Section 1. Number 1211 CHAIRMAN ROKEBERG said it seems that Mr. Schwartz's intent on the recommendation for language in Section 1 is to clarify what the original intent of the law was, particularly in light of the idea that there is a 30-day transfer rule on title in the state. MR. SCHWARTZ indicated Chairman Rokeberg is correct. CHAIRMAN ROKEBERG said the additional language in subsection (2), page 2, line 7, is for clarification purposes. Number 1252 MR. SCHWARTZ explained problem subsection 2 addresses is that a vehicle purchase transaction is a paper intensive transaction already. It has been noted by the Federal Trade Commission in hearings concerning car transactions that the consumer is faced with a stack of papers. They are signing and reading a lot in a short period of time. The goal is to make sure that the consumer actually gets to meaningfully read the piece of paper put in front of them concerning I/M status and to sign an acknowledgment that they're actually given the piece of paper prior to sale. Mr. Schwartz explained it is also a matter of assisting the consumer in proving what happened and when it happened. The goal of subsection (2) is to ensure that the consumer does get the I/M status information prior to sale and that there is some way to show the consumer actually received it. Number 1436 CHAIRMAN ROKEBERG asked if there is actually a certificate of noncompliance. MR. SCHWARTZ said Mr. Morrison correctly stated that there is no official state certificate of noncompliance. In Anchorage, the way that is handled is there is certificate of I/M inspection and it's stamped with the language title only waiver. He said, "So if a vehicle does not pass I/M, the municipal I/M Office is nevertheless able to give permission to the owner of that vehicle to sell it, but the owner can only transfer title and such a sale would not allow the purchaser to register the vehicle with DMV unless and until the vehicle is brought up to I/M standards." Number 1545 REPRESENTATIVE COWDERY said if the legislature requires the dealers to do all these things and to make information available, he doesn't see where it could be done better. He indicated he has problems in making people who are buying something to be required to do anything. He said if a person goes to bank to borrow money, they sign a lot more (indisc.). Number 1809 MR. SCHWARTZ said the additional thinking is to make sure that the dealer does give that I/M status disclose paper to the consumer prior to sale by obtaining the consumer's signature. That would ensure that the information is transmitted prior to sale. Mr. Schwartz indicated that currently, that information doesn't have to be given until the time of title transfer which is after sale and can be up to 30 days after sale. REPRESENTATIVE COWDERY pointed out that a signature doesn't guarantee that the consumer has read anything. Number 1841 MR. SCHWARTZ explained that it puts a burden on the dealer to obtain the signature from the consumer prior to sale. Although there may be many ways of accomplishing the goal of disclosure prior to sale, this is one of them. He noted it may not be the most perfect way to do it, but the original intent of the legislation was to give the buyer information prior to sale. Often times, a used car would require a fair amount of work in order to bring it up to I/M standards. Mr. Schwartz pointed out that he has heard from consumers who have said, "Gee, you know if I had only known prior to sale that I was going to have to put another $1,000 - $1,500 or what have you, into the vehicle just so I could register it, I would not have bought that particular vehicle. I would have bought another one that I didn't have to spend money on." Number 1935 REPRESENTATIVE COWDERY asked if all the complaints were valid complaints. MR. SCHWARTZ indicated that the Office of the Attorney General stopped taking individual complaints about ten years ago as they didn't have the staff to do it. He said he is the only full-time employee in consumer protection and he also does antitrust. Mr. Schwartz said he can tell the committee members that the consumers that he has actually spoke with have indicated that they found out after they bought a vehicle. Number 2116 REPRESENTATIVE RYAN said the dealer is required to due diligence in a number of respects. He said, "This basically assumes that the buyer is -- no liability for anything. They don't have to exercise any judgement, they don't have to do anything. They just come in there and say, `I want to buy the car,' and they don't have to take any reasonable precautions to ensure that they're getting what it is they think they're buying. To me, that's kind of an unfair burden to put upon the guy who is selling it. You're holding the buyer completely harmless and saying, `Well you can come back on this right to cancel after notice.' You know there are an awful lot of things that go into running a business and when you already have a deal and you've gone through all the hoops and everything is closed - the banking has been arranged and everything else and now we've got to back and undo all this stuff because the buyer came up and discovered something that they didn't take the time to discover beforehand. Don't you think (indisc.--coughing) responsibility here that there is some due diligence demanded on the part of the person who is buying?" Number 2239 MR. SCHWARTZ explained it is not always possible for a buyer to discover damage to a vehicle, if you're now referring to section (2) of the bill, prior to sale. He said often the defects to a vehicle are hidden defects and only upon very close inspection, beyond what would normally be considered as a buyer's due diligence, would a person discover that a vehicle had been previously wrecked and it might be a dangerous vehicle. Mr. Schwartz explained that many buyers do no pay an inspector a large sum of money to do a four way wheel alignment on a vehicle or to fully inspect a vehicle prior to purchase. Instead, they may ask an auto dealer if the car has ever been in a wreck and they may not get a truthful or complete response. Mr. Schwartz informed the committee that the state has actually sued a dealer concerning these very issues and prevailed in the Alaska Supreme Court. Often times, the consumer's due diligence might be asking the dealer about the condition of a vehicle and the dealer may not provide truthful or complete information which may only be discovered after sale. Number 2541 MR. SCHWARTZ referred the committee members to Section 2 of HB 142 and said it is actually an evolution from an earlier draft of the bill. He referred to mentioning that during the last legislature, there was a bill concerning I/M disclosure and that provision is currently in HB 142. Also, during that legislative session there was a request to amend Representative Brown's bill to add an accident and damage disclosure provision. That provision was drafted and then HB 403 died. Mr. Schwartz explained an accident damage disclosure provision was included in the original version of HB 142. It basically put into more specific language the case law that had developed as a result of the state's litigation against Johnson Nisson - Jeep/Eagle. That was the litigation that resulted in the Alaska Supreme Court decision this year. Mr. Schwartz said, "The dealers association looked at that, contacted the lieutenant governor's office and there was discussion between myself, the head of the dealers association, Steve Allwine, and the Lieutenant Governor concerning the concerns that the dealers association had with the original version of the accident disclosure provision. The dealers association pointed to disclosure requirements in about 32 different states that were more specific than the provision that was drafted in the original bill. So the attorney generals office and myself, in particular, took a look at those statutes and came up with a radically different approach than the one that was in the original version of House bill 142. And that approach was then modified even further and what you see now in the sponsor substitute for House bill 142 is the latest - the most recent by the attorney generals office to come up with a statute that is similar to the type of scheme that you see in other states with respect to damage disclosure." Number 2838 MR. SCHWARTZ said the idea is to present the consumer with enough information about material damage - that the consumer can make a wise decision and correctly bargain with respect to their car purchases. He said Mr. Morrison mentioned that as state law currently exists, a dealer would have to disclose if a bolt were replaced on a new car. Mr. Schwartz said, "With all due respect to Rick Morrison, I don't think that would necessarily be the case. Under state law, I think that if the repair that was need or effectuated was material to the purchase, then disclosure would be required. For example, if that bolt were somehow so important that the way it was replaced created a danger to -- created a safety problem in the vehicle, then that would be a material aspect of the sales transaction - would have to be disclosed. But I think if it were immaterial, if it was simply a factory bolt that had to be replaced and the vehicle is otherwise in the same condition it would have been and had it been brand new and the bolt never replaced, I think you would have a hard time finding any court in the state of Alaska to say that - not to disclose that bolt replacement on a new vehicle would be a violation of a consumer protection law." Mr. Schwartz explained the current version of the bill is an effort to make more specific the damage disclosure obligations of a dealer. Number 3028 REPRESENTATIVE RYAN referred to Section 6, page 5, regarding confidentiality, and said he can understand why if the attorney generals office was carrying on an investigation they might not want somebody to know the results of their investigation during the time or before they bring a complaint. Representative Ryan questioned that after it is all said and done, why does the information have to stay confidential. MR. SCHWARTZ explained that there are any number of instances in which the state would close an investigative file. He said they may close a case after litigation, and it may be successful litigation. He said they may close a case where they feel it shouldn't be pursued or they may close a case about a month after it is started. For example, the state's investigation of the alleged boycott by the Anchorage television stations of the state's bid for television service to Girdwood and Homer two years ago. Mr. Schwartz said he closed that case a month after he started it because fortunately it was resolved. He said if a public records request came in on a closed investigative file, it is not all that clear how it should be treated. Mr. Schwartz said, "If you, as a businessman, are the subject of a complaint and I look into it, as a state attorney general office, and find that it's not meritorious and close it and then the newspaper gets wind of it and wants to find out that someone actually did file a complaint against you, this particular bill would allow the attorney general's office to keep that record confidential." Number 3318 REPRESENTATIVE RYAN indicated concern that if a complaint were made, you wouldn't know what somebody would have said about you and you don't whether there is any substantiation to it. You couldn't find out, but there is the fact that a complaint was made and it doesn't do your reputation any good when you can't defend. Number 3421 MR. MORRISON said his office hasn't had any complaints that he is aware of since he has been doing consumer protection work. He said usually businesses that haven't been contacted by his office won't contact him to get their attention. He said they don't want to hear from his office if they aren't contacting them. They aren't that much interested in knowing what is in their files. REPRESENTATIVE RYAN said he would like to know what the business community thinks. MR. MORRISON said they litigated this very issue in the Alaska Superior Court and then filed a notice of appeal in the Alaska Supreme Court on the seafood price-fixing case. The seafood processors prevailed upon the Governor's office and the attorney general to withhold the records that they had submitted to the state and the state closed its investigation of alleged price- fixing. He said the state wanted to withhold those records as they didn't feel that they should be publicized. The business community was behind the state's position of wanting to keep the records confidential. It was the plaintiff's community who actually wanted them released. Number 3605 REPRESENTATIVE DAVIS indicated he had other business to take care of. He said he would like to interject that as the discussion takes place on the legislation, he thinks the committee will find a majority of the concern addresses the motor vehicle sections of the bill. Representative Davis said Chairman Rokeberg may wish to wait until the Alaska Auto Dealers Association and Mr. Schwartz meet to hash out concerns and see if the wording can be addressed to the satisfaction of all parties. He said Chairman Rokeberg may want to want to separate the motor vehicle sections and create another bill. Representative Davis indicated that whatever the chairman chooses, it would be fine with him. Number 3742 CHAIRMAN ROKEBERG said he appreciates Representative Davis comments. He said the committee members would await the outcome of the meetings between Mr. Schwartz and the association. Perhaps subsequent to the meetings, the committee can make a decision as to how this should be pursued. Number 3821 CHAIRMAN ROKEBERG asked Mr. Schwartz to comment on an October 9, news article that was published about a court order against a local dealer that stemmed from a supreme court case that was finally resolved in July, 1997. Number 3840 MR. SCHWARTZ stated the Alaska Supreme Court affirmed on July 18, 1997, the 1995 court ruling concerning Johnson's Nisson. The state had taken Johnson's Nisson to court and had a 3-week jury trial and the jury found Johnson's Nisson liable on 18 of 22 counts of civil fraud with the respect to the sale of eight vehicles. Johnson's Nisson appealed to the supreme court. There was a permanent injunction and a money judgement. The supreme court unanimously affirmed the jury and the court order of 1995. On August 15, Johnson's Nisson paid the state $190,184 in restitution, civil penalties, attorney fees and costs, and pre and post judgement interest. On August 16, 1997, the state has alleged in a contempt motion that there was yet another sale by Johnson Nisson, to a consumer in Anchorage, of a vehicle that had been previously wrecked and then repaired. The damage was not disclosed to the consumer prior to sale and there were a variety of aspects of that transaction which makes it violation, in the state's view, of the court injunction and a safety hazard to the consumer. Mr. Schwartz informed the committee that his telephone has been ringing off the hook concerning this particular problem. CHAIRMAN ROKEBERG asked, "Is it a reconstruction repair problem?" MR. SCHWARTZ said, "That's correct - prior accident damage that has been repaired to a certain extent, maybe just cosmetically repaired and then not disclosed despite inquiries by the consumer during the sales process and then the consumer finds out, after sale, that the vehicle has been in a serious wreck." CHAIRMAN ROKEBERG asked what the present state of the law is based on the reconstruction provisions as far registration is concerned. He asked to what extent and scope does the vehicle have to be damaged to fall under that category. Number 4124 MR. SCHWARTZ said when an insurance company totals a vehicle, they have to report it to the DMV. The DMV then puts the letters "Rec." on the registration. CHAIRMAN ROKEBERG asked if that system is working. MR. SCHWARTZ said it doesn't address the entire problem. He suggested checking with DMV to see how well that system is working. The Office of the Attorney General doesn't necessarily monitor that particular process. He said there can be damage to a vehicle to the extent that the vehicle is not totaled, but the damage can be material. He referred to the 1995 Nisson Sentra, that is the subject of this (indisc.) motion, and said it was sold for $11,000. There was $6,200 worth of repaired damage to the Sentra. The Sentra was booked at about $8,300 in terms of a trade-in value. It wasn't a vehicle that was totaled, yet there was substantial damage to that vehicle and it should have been disclosed to the consumer. Number 4237 CHAIRMAN ROKEBERG asked if there is a state law requiring the disclosure of damages. MR. SCHWARTZ said, "Case law, interpreting the state Consumer Protection Act, requires that material damage to a vehicle be disclosed prior to sale. The goal of HB 142, Section 2, would be to make those disclosure requirements more specific. But even under existing consumer protection law, material damage to a vehicle should be disclosed prior to sale otherwise the consumer would have a cause of action." Number 4313 CHAIRMAN ROKEBERG questioned whether the words "material damage" is generally a term of art. MR. SCHWARTZ responded that it is gray term which depends upon the facts. It is all fact driven. TAPE 97-64, SIDE B Number 0300 CHAIRMAN ROKEBERG said Alaska doesn't have a statutory requirement for disclosure, but does have a case law requirement for disclosure. MR. SCHWARTZ said there is case law interpreting the state Consumer Protection Act that says it's an unfair or deceptive act or practice to mislead or deceive a consumer in connection with a consumer transaction. Number 0328 CHAIRMAN ROKEBERG asked if that is in existing statute. MR. SCHWARTZ stated that is correct. The words "mislead" or "deceive" are in AS 45.50.471(b). CHAIRMAN ROKEBERG said, "Unless you're fortunate enough to be a member of the Alaska Auto Dealers Association or in this room right now or had some other way of knowing that, you wouldn't really know or have been on notice that you had that duty then would you? Unless you hired an attorney to develop a SOP (standard operating procedure) in procedures for your business operation that you had to do that before, you would market any automobile unless you had an attorney." Number 0409 MR. SCHWARTZ informed the committee that most auto dealers know that states have consumer protection acts of one type or another. He said he believes just about every state in the nation has a consumer protection act and the mislead or deceive language is virtually uniform throughout the country and it's modeled after the Federal Trade Commission (FTC) Act, which is a national act that has been in existence for years. It is often said that, even by the Alaska Supreme Court, that the state's Consumer Protection Act is a baby FTC Act. Number 0444 CHAIRMAN ROKEBERG said he believes there was some testimony where it is the duty on the part the dealer to disclose because of the FTC Act. MR. SCHWARTZ said that is how it has been interpreted in Alaska. He noted Alaska case law is based on federal case law interpreting the FTC Act. Number 0504 CHAIRMAN ROKEBERG asked if a person could bring a cause of action, in federal court, if that person thought they had grounds for it if they had been deceived. MR. SCHWARTZ responded that he doesn't know if there is a private right of action under the FTC Act for a consumer. He said he thinks the consumer would have to sue under the state Consumer Protection Act. Number 0529 REPRESENTATIVE RYAN said the reality of the situation that makes it difficult for the dealer is that it may be expedient for an insurance company to total a vehicle rather than pay the cost of repair. He said it doesn't mean that the vehicle can't be repaired. It could still be in reasonable condition for extended service, but once the insurance company takes this action to cut their losses, they put the wording on the title which substantially decreases the value of the automobile. He referred to Mr. Morrison saying that he doesn't have a logbook similar to that of an aircraft. He gets a vehicle in, it appears that there are no ripples in the doors and you can't see where the paint doesn't match. Mr. Morrison acts upon the assumption that what he has is a whole automobile. He later finds out that there had been a problem and it was repaired and, for some reason, it wasn't on the title. A person would be set up for a lot of damages. He said evidently the court has found that as a general practice of business, these people are doing this and there has been a number of incidences. Representative Ryan said there seems to be a lot of responsibility on someone without their ability to have previous knowledge. He asked, "Is there any intent in there -- deceives or defraud with intent to act in a criminal manner or something? Or is it just deceive or defraud which is a catchall for anything that anybody wants to throw at them?" MR. SCHWARTZ explained the Consumer Protection Act is a civil act, it is not a criminal act. A dealer in Alaska, under case law, is responsible for conducting a reasonable inspection of a vehicle that they offer for sale to the public, and that was what came out of the Johnson Nisson litigation. Mr. Schwartz referred to the wording "a reasonable inspection," and said if a reasonable inspection would not have disclosed prior damage to a particular vehicle, then the dealer would not be responsible for that. He said he doesn't know if a dealer could be necessarily set up. Mr. Schwartz said, "Of course, we know that dealers take in a lot of cars in trade and dealers employ people who are experts in the acquisition and appraisal of used vehicles for resale on their lot. Every dealer has experts, usually very experienced people, who go to car auctions or look at every single car that's taken in on trade." Mr. Schwartz said these experts are very good at detecting, on a reasonable inspection, prior repaired accident damage. If the expert can't detect it, then usually they've conducted their reasonable inspection and he doesn't know that a court would say that they're responsible for doing anything more than that. He said that the ruling in the Johnson Nisson case was that a dealer is not responsible, carte blanche, for disclosing any prior accident damage whether a reasonable inspection would determine it or not. REPRESENTATIVE RYAN said he thinks there needs to be a more level playing field. Number 0910 REPRESENTATIVE COWDERY referred to page 3, lines 4 through 7, Section 45.45.460, and said it basically assumes that the buyer is going to obtain a refund of the full amount paid by the purchase prices. Later on it says, "and charges that are related to the transaction and incurred by the buyer." Representative Cowdery said, "Say if we had two people, one of them paid cash at the dealer and the other guy borrowed money from a pawn shop or somebody at high interest rates, and he incurred that amount money -- you know to him he incurred that amount of cost. How would the -- is this an area that -- how would you distinguish? Would you pay the first guy because he paid cash and didn't borrow the money? Would you pay the second guy what he borrowed plus the cost of the loan and all of this? I mean how would you define that area?" MR. SCHWARTZ informed Representative Cowdery that any interest charges would be totally disallowed under this legislation. Charges are specifically defined to include license fees, registration fees and similar governmental charges. Number 1050 REPRESENTATIVE COWDERY referred to the wording in the bill, "In this subsection, `charges' includes license fees, registration fees..." He said he wasn't clear in that just because it includes that wording, it doesn't include interest and other things too. Number 1145 MR. SCHWARTZ referred to a question by Representative Ryan regarding the telemarketing portions of the bill and if they would impact on the auto dealer obligations. He said, "Absolutely not because the telemarketing law, itself, has an exemption which says that face-to-face -- deals that are consummated face-to-face even if they start over the telephone would not be the subject of telemarketing registration and legislation." REPRESENTATIVE RYAN pointed out that telemarketing is a very viable tool for a majority of businesses in the world and not just American. He said he isn't interested in seeing it restricted to the point where it makes it impossible or extremely difficult for those people to do business. He stated that business needs to be promoted in this state. Number 1345 MICHAEL STEPP, President, Stepp Brothers Lincoln Mercury/BMW; Board Member, Alaska Auto Dealers Association, came before the committee members to testify on SSHB 142. He referred to figures presented by Mr. Morrison regarding the percentage of sales in the state of Alaska and said it is also his dealership's understanding that the dealer's sales represents a minority of the total used vehicle sales in the state. Therefore, any legislation that is passed that would not cover a private transaction, would appear to not address the problem in total. He said, "I don't know what we, as a state, you as a governing body, would tend to achieve if in fact a problem was not going to be able to identify but a minority portion of the whole. So, we may keep mindful of the fact that if we don't make the law universal to all transactions, that in fact it would not have universal applicability, it would not be fair to all concerned. Secondarily, the I/M bill that was passed in 1992, that requires a motor vehicle dealer, upon the sale of a vehicle, to furnish the DMV within both the Municipality of Anchorage and I believe also that of the City of Fairbanks, a valid I/M inspection. The new law, as it's proposed, would mandate us to show the buyer, prior to sale, that in fact this is taking place. Well, it is mandated under the 1992 law that we have to do it in order to pass title and registration. What is the validity, for lack of a better term, or the purpose of showing you, as a perspective buyer, Representative Ryan, that I in fact have done that if in fact I have to do it before I pass title? So it seems like another mechanism within the sale transaction to just either impede or duplicate a process that's already there. If I cannot furnish you with a valid I/M, then I'm not going to be able to consummate that transaction. You may have taken delivery of the vehicle today, but if I cant' pass title in your name, then what in fact have I done?" Number 1609 MR. STEPP referred to a comment by Mr. Schwartz in that buyers have bought vehicles only to find that vehicles don't qualify for I/M and then they are burdened with additional expense. He said, "I do not know of a motor vehicle dealer that has the ability to go to a buyer after they've already consummated a transaction -- and I'm supposed to furnish you with a valid I/M to say listen, `You've got to spend another $400 over and above what I sold you the car for to get it to qualify for I/M.' That is our burden. We've sold you the vehicle under the assumption that it does qualify. If it needs $1 worth of repair or it needs $500, it's our responsibility to do that - to upgrade it or reverse the transaction and give you a full refund. In other words, if we can't deliver you what we said were going to do, it's incumbent - just in good business practices. I don't know any consumer that would buy into that without there being some degree of, as you pointed out appropriately Representative Cowdery, in many many occasions of your conversation.... It just doesn't make good sense." Number 1738 MR. STEPP referred to the classification of vehicles and said he is extremely concerned about the possibility of someone driving a vehicle and incurring some damage. He said, "It is very well chronicled known in the state of Alaska that we live in a highly volatile area with respect to the possibility of damage. I would submit to you that if you checked with State Farm and also Allstate, who are the two primary vehicle insurers for collision damage, that they would tell you that within the state of Alaska the likelihood, on a percentage basis of an owner receiving damage to their vehicle versus other areas of the country, because of the predominately cold weather and deteriorating road conditions that we function under is much much greater. Therefore, when you make an investment in an automobile and you buy this insurance, and you subsequently encounter damage and you have that damage taken care of in a commercially reasonable manner through trained and professional technicians -- just to give you an example, our dealership has invested in excess of a half a million in just special tools and equipment to duplicate manufactured paint processes and other types of things - for measuring frames and what have you. If those expenses have in fact performed and those damages have been corrected in a commercially acceptable manner with original manufactured parts -- why then should you, sir, who has a mortgage on you vehicle let's say now have to have what we would call in the industry `a substandard vehicle?'" Mr. Stepp said he thinks it would serve the public no meaningful improvement in their status by trying to have repaired vehicles in one class and non-repaired in another. There is really no reason, if a vehicle has been repaired in a commercially acceptable manner, for there to be two classes of vehicles. Mr. Stepp said the bill would legislate good business sense. He said it tells the dealer that they will be responsible for knowing everything that has ever happened to a vehicle, and if the dealer doesn't, the consumer will have a great window of opportunity to take advantage of the dealer. MR. STEPP referred to material damage and said he would submit to the committee that the word "material" versus the word "specific" is much too undefined. Mr. Stepp continued to give testimony regarding SSHB 142 in saying that the bill will impede reasonable commerce transactions within the state. Number 2508 REPRESENTATIVE RYAN referred to vehicles that the dealer accepts as trade-ins and said in the course of their business some of the vehicles they want to resell and some they wholesale. He asked Mr. Stepp if he is required to I/M everything they are going to wholesale. MR. STEPP said they are required to I/M everything that they are going to sell to a consumer. If they're are going to sell to another dealer for a wholesale purpose, they don't I/M. It is a requirement of that dealer to do so. He referred to the wording "as is, where as," and said that is basically how they wholesale vehicles. REPRESENTATIVE RYAN said asked Mr. Stepp if he thinks there is a way to lessen the load regarding "gypos" or people within the industry that aren't playing by the rules and gives the industry a bad name. MR. STEPP said maybe there could be a greater requirement placed on people who wish to obtain a dealer license. Number 2910 CHAIRMAN ROKEBERG asked Mr. Stepp if the Johnson Nisson case has effected his business practices in any way. MR. STEPP said if a member of the legislative body goes out and commits an illegal act, the committee members are a part of that body, and will be painted with a broad brush. He said not every legislator is bad, and the same goes for auto dealers. Mr. Stepp stated that unfortunately, what happened with respect to the Johnson situation is unfortunate for all the dealers. Number 3110 CHAIRMAN ROKEBERG indicated there was earlier testimony that there may be the necessity for legislation regarding damage to new cars. He asked Mr. Stepp to tell the committee what a typical relationship is between a manufacturer and a dealer relating to new car damage. MR. STEPP said he can respond regarding the relationship his business has with the Ford Motor Company. If a vehicle sustains ex amount damage, maybe in the neighborhood of $750 to $1,000, it is called "disclosable damage." He said if his business receives a vehicle with a bad wheel cover, that is something they don't have to disclose to a consumer because they replace it. He said if a vehicle sustains frame damage or something of that nature, the vehicle will never reach his lot. It will go through a Ford Motor Company sale, for instance, on the as is, where is situation, where it is clearly denoted on the vehicle that the vehicle was damaged during transit and can't be sold as a new vehicle. Number 3404 CHAIRMAN ROKEBERG asked Mr. Stepp if he has had any difficulty with the DMV as far as the title transfers and the timing of all those transactions over the last couple of years. MR. STEPP explained that two dealers are working on a pilot program that would allow all the dealers to do the licensing and titling within their own stores. If that comes to pass, they will all have the opportunity to handle that and take some of the burden off the state. He said he thinks the DMV has done a good job with respect to the resources that they've been given. Mr. Stepp said he thinks it would benefit everybody to remove the legislation from the current bill and deal with it on a separate basis. When and if it is dealt with on a separate basis, it should be kept in mind that a "new car" piece of legislation should be different than that of a used car. They shouldn't be tied together because the expectations are not the same. He said he would also submit that the I/M provision is a duplication and isn't necessary. Number 3606 JUANITA HENSLEY, Chief, Driver Services, Division of Motor Vehicles, Department of Administration, came before the committee testify. She informed the committee members that from the division's standpoint, they have a very good working relationship with the Alaska Auto Dealers Association. She said there are two dealers who are currently issuing titles and registration to new vehicles and, hopefully, that will be expanded to the other dealers that choose to do the same service. She said it seems to be working quite well. Number 3657 CHAIRMAN ROKEBERG said there has been testimony that the insurance industry is to inform the DMV when there is a totaled or fully damaged automobile and then there is a code added to the registration. He asked Ms. Hensley to describe that process and comment whether that process is working. MS. HENSLEY explained that several years ago the DMV met with the Department of Law and the insurance industry regarding a problem that was brought to the division's attention in that the insurance industry was totaling out vehicles based on an economic value. In some cases, they were totaling out vehicles because they were in disrepair. She said the division was issuing titles and registration as if nothing had happened on vehicles. After that meeting and after working out problems, the insurance industry now reports to the division any vehicles they have totaled out, whether it was for economic reasons, or whether the vehicle is determined to be a wrecked vehicle. The division does make note on the title and on the registration that the vehicle is a reconstructed vehicle that's been repaired. CHAIRMAN ROKEBERG asked if it is a statutory requirement. MS. HENSLEY responded it is a regulatory requirement. Number 3842 CHAIRMAN ROKEBERG asked if the DMV collects any fees to put the wording on the title or registration. MS. HENSLEY responded they charge for the regular transfer of title or registration. CHAIRMAN ROKEBERG said the insurance company is under a regulatory requirement to inform the division of the information. He asked if it is really working or if there has been any problems brought to her attention. MS. HENSLEY said no problems have been brought to her attention. She said from her experience, those that are reported to the DMV are changed on the title and registration. Number 3950 REPRESENTATIVE COWDERY referred to the two dealers who are participating in the new program in issuing title for new vehicles and asked if there has been any thoughts on allowing a dealer who sells a used vehicle to do the same thing. MS. HENSLEY said that is next step that they'll be looking at. She noted there is a scheduled meeting with car dealers, later in the week, to talk about what they want. She said that is something they're moving towards. Ms. Hensley noted they have expanded the program to allow the I/M inspection stations not only to issue the registration with the prebill of the registration, but also those individuals who do not have prebills where the car (indisc.). Number 4000 MR. MORRISON informed the committee he is one of the two dealers who is participating in the program. TAPE 97-65, SIDE A Number 0013 MR. MORRISON said the relationship between the dealers and the DMV is very good. He said his business is one of the businesses that is participating in the pilot program to do titling in-house and it has been very successful. Prior to doing that time, it could take as long as 60 days to get the license plates. In some cases, if there was one mistake anywhere along the way, it could take up to 90 days. He said the department set them up with a computer system so they could communicate. If someone came in and bought a new vehicle today, he could hand that person the license plates within about ten minutes after signing the paperwork. It is very quick and there are no lines to go through. He said he has been told that in a very short time, they can add simple transactions for used cars. He said it can get complex and at that point he would let the DMV deal with it. It has been a good program. CHAIRMAN ROKEBERG indicated SSHB 142 would be held for further consideration. ADJOURNMENT Number 0201 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 3:56 p.m.