Legislature(1997 - 1998)

03/14/1997 03:20 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
   HB 178 - UNIFORM COMMERCIAL CODE:LETTERS OF CREDIT                        
 CHAIRMAN ROKEBERG indicated that the committee would address HB
 178, "An Act relating to letters of credit under the Uniform                  
 Commercial Code; and providing for an effective date."                        
 Number 103                                                                    
 ART PETERSON, Attorney, Uniform Law Commissioner, State of Alaska,            
 came forward to testify on HB 178.  He noted that another Law                 
 Commissioner was in attendance via teleconference in Anchorage.  He           
 wished to cover some general points of this legislation.  Mr.                 
 Peterson continued that the National Conference of Commissioners in           
 Uniform State Laws, the body that promulgated the original Uniform            
 Commercial Code (UCC), including this Article 5 on Letters of                 
 Credit, is a 105 year organization.  Alaska has adopted about 70 to           
 75 of the Uniform Acts promulgated by this group.  The bill before            
 the committee is the UCC's latest amendment of a substantial part             
 of this Commercial Code.                                                      
 MR. PETERSON added that the organization takes many years to                  
 develop any revision, such as what's before the committee                     
 currently.  One of the main points of this legislation, dealing               
 with letters of credit, is that it brings the law current with                
 practices and customs in international trade.  Alaska is becoming             
 more involved with international trade and they don't want to be              
 lagging behind the rest of the country in this area.  Fifteen                 
 states have already enacted this revision before the committee.               
 Twelve states have introduced it in the 1997 session and it was               
 only promulgated by the national conference in 1995.                          
 MR. PETERSON noted as a general matter, this legislation revises              
 the law that was enacted and developed about 40 years ago.  There             
 has been no significant amendment of the law since then.  In this             
 revision the law is simplified and it resolves questions which have           
 arisen, especially with regard to the developing use of computers             
 and modern technology.  It clarifies that the parties to a                    
 transaction can rely on the international standards of practice.              
 It conforms to international law and practice.  The letter of                 
 credit industry which is the main means of financing international            
 credit is a two hundred billion dollar industry in the United                 
 States.  This legislation helps to avoid litigation in a number of            
 Number 432                                                                    
 JERRY KURTZ, JR., Attorney, Uniform Law Commissioner, Alaska,                 
 testified via teleconference from Anchorage.  Throughout the years            
 he's represented financial institutions on a fairly steady basis.             
 A typical attorney in Alaska has never seen a letter of credit.               
 There are no reported Supreme Court, Alaska cases involving letters           
 of credit.  Letters of credit are rare in the litigation world.               
 This is due in part to the Uniform Act.  The big problem that's               
 come up in the last twenty years with letters of credit has been              
 the advent of computers.  There have been some problems applying              
 the forty year old statute to present commerce as it is being                 
 conducted.   A lot of letters of credit are still hard paper                  
 documents between individuals and banks, businesses, etc.  More and           
 more of these types of transactions are being done by some type of            
 electronic communication.                                                     
 MR. KURTZ stated that from the standpoint of Alaska he couldn't               
 stress enough the importance of letters of credit in foreign                  
 commerce.  They are best thought of as a bridge, a device whereby             
 both a person in Japan and Korea, for example, can deal with an               
 Alaskan company and do so without worrying whether they will be               
 paid for the goods delivered and visa versa.  The letters of credit           
 are primarily used in international commerce to assure that a party           
 in one country that is owed money for goods provided in another               
 country will be paid for these goods.                                         
 MR. KURTZ added that countries have language differences and                  
 different banking systems with lots of distance in-between,                   
 including a time lag based on what type of transport is involved              
 and the risk of not being paid.  A letter of credit is a device to            
 help solve these problems.  The practice of letters of credit in              
 international trade has been used for many decades.  He emphasized            
 that Alaska is heavily involved in international trade and is                 
 becoming more and more so.                                                    
 Number 805                                                                    
 DOUGLAS LOTTRIDGE, Assistant Attorney General, Commercial Section,            
 testified via teleconference from Anchorage on HB 178.  He is the             
 attorney assigned to review this legislation.  In so doing, he has            
 talked extensively with both the previous gentlemen who testified.            
 He added that his review of the bill comports with what they have             
 testified to.  He stated that on behalf of the Department of Law,             
 they have no legal problems with this bill and they support it.  He           
 reiterated the fact that because Alaska is so involved in                     
 international trade, it only makes sense for them to have a uniform           
 law that other international attorneys and businesses can rely on             
 as being consistent with the law they are familiar with.                      
 Number 917                                                                    
 REPRESENTATIVE JOHN COWDERY asked if this legislation would affect            
 the state's AIDEA loan programs.                                              
 MR. LOTTRIDGE stated that he had not specifically discussed this              
 possibility with the Alaska Industrial Development & Export                   
 Authority (AIDEA), but certainly any international transaction                
 using letters of credit would be affected by legislation, whether             
 it's AIDEA or any other organization.  Anyone using a letter of               
 credit would be doing so with this law in place, which this law               
 would certainly facilitate their dealings with other private                  
 enterprise or other countries.                                                
 Number 1044                                                                   
 REPRESENTATIVE JOE RYAN referred to the fact that a letter of                 
 credit requires seven days for the bank to honor it once all the              
 contract conditions are met.  When the person who's paying receives           
 this letter of credit, the funds that are required are deposited in           
 the bank where the letter is issued.  The corresponding bank on the           
 other side receives a wire transfer.  At the maximum there's about            
 three days that they need to fulfill federal requirements to handle           
 this.  Otherwise, they take the other four days and they put the              
 money in a money market at three percent and they make money off of           
 the other party's float.  If a party wants to get this money sooner           
 a discount note is signed which is commonly known as a banker's               
 acceptance.  The bank charges a fee for giving the money up front.            
 Representative Ryan didn't see why a person has to pay a tribute to           
 a bank to do the normal course of business if they chose that in              
 three days period of time they wanted their money and met all the             
 requirements.  They should be able to be paid out if everything is            
 as stated in a letter of credit.  He said he didn't see anything in           
 this legislation calling for a dispute resolution.  Alaska has a              
 great set of statutes on arbitration.  He thought these should be             
 referenced in this legislation.  He noted the different types of              
 letters of credit and it's become a practice lately in the market             
 for people to try and get some unsuspecting person to send them a             
 revolving letter of credit for purchases that are made on a                   
 continuing basis.  Some people sell these revolving letters of                
 credit on the market and leave the purchaser stuck having received            
 nothing.  A lot of due diligence is involved by the person issuing            
 the letter of credit and with the institutions with which they're             
 dealing.  He stated that he's consulted with individuals regarding            
 this legislation and was waiting for some responses.  He wanted to            
 make sure there were no loopholes to this legislation.                        
 REPRESENTATIVE ROKEBERG stated that he would also like answers to             
 some of the questions Representative Ryan raised.  He thought this            
 was an important piece of legislation and something that should be            
 considered properly.  He then asked Mr. Kurtz to give an                      
 explanation of some of the concerns which Representative Ryan                 
 Number 1295                                                                   
 MR. KURTZ noted Sec. 45.05.108, on page eight of the legislation              
 dealing with the seven day float issue.  He stated that this was a            
 delicate issue.  This gets into the area of forgeries which is an             
 enormous problem in the banking world.  He asked how long do they             
 give a bank or somebody else that has issued a letter of credit to            
 determine whether the documentation is adequate to require someone            
 to pay.  He said he was well aware of the problem of bankers making           
 money on float.  Not very many people like this practice, but on              
 the other hand the problem of proper documentation and times cannot           
 (indisc.) by looking at what's on the table in front of them.  This           
 section is a compromise in that seven business days is an outer               
 limit.  There was considerable discussion regarding the wording of            
 this section.  There should be a reasonable time after presentation           
 of the documents to produce the money, but whether it's reasonable            
 or not, someone doesn't have more than seven days to either do this           
 or say they aren't going to pay, period.  There is no answer to the           
 problem which Representative Ryan has presented.  Verifying                   
 documents before the letter of credit is honored, is a difficult              
 thing to do, yet one of the advantages of a letter of credit is               
 that they do in a rather expeditious manner, make money move.                 
 Three days or five days could be used but this could create a                 
 uniformity problem.  If this language is out of phase with what the           
 rest of the world is doing this makes it more difficult for a                 
 business man to operate under these parameters.                               
 Number 1479                                                                   
 MR. PETERSON added that he could make available to Representative             
 Ryan the official Uniform Laws Conference commentary under this               
 REPRESENTATIVE RYAN stated that one of the biggest things someone             
 does when engaged in international trade is to exercise due                   
 diligence.  If someone looses money on a deal because of fraud or             
 some other problem and they've engaged in proper due diligence,               
 well then, "shame on you."  The nature of business being what it              
 is, it behooves the person who's handling these things to do so.              
 It's a common practice in the banking community that what they make           
 on their overnight deposits is enough to pay the interest they pay            
 out to the depositors.  What they make on their loans, is in                  
 effect, a net profit other than taxes.  They do quite well and some           
 people would like to have this money invested.                                
 Number 1576                                                                   
 CHAIRMAN ROKEBERG clarified that this depends on whether banking              
 institutions are buying or selling federal funds overnight in order           
 to make money.  He asked about the issue regarding the lack of any            
 dispute resolution.                                                           
 MR. KURTZ said he would be glad to respond, but wanted to finish              
 with his comments on the previous issue and pointed out that this             
 legislation is a default act.  "This is what goes unless it's                 
 varied by agreement."  He stated that there's nothing wrong with              
 someone negotiating with their banker along with the other parties            
 involved to require that they pay interest for the period they                
 loaned this money while they investigate.  He suspects that this              
 has been done at times.  On the issue of arbitration.  Agreements             
 to arbitrate in the event of dispute on letters of credit are                 
 allowed, but generally this is not normally done.  Arbitration is             
 a concept unheard of in many places.  Alaska has the Uniform                  
 Arbitration Act and it's worked very well, but not all states have            
 this Act and other countries probably have something similar.  In             
 terms of something that will be readily understood, most other                
 countries have some idea how the United States court system works             
 and visa-versa.                                                               
 MR. KURTZ continued that international commerce looks very strongly           
 for certainty of what laws will govern.  In arbitration, it's never           
 known how the arbitrators got where they got.  He stated that he              
 was a strong fan of arbitration, but inserting anything like this             
 into the present arbitration would do a disservice to Alaskan                 
 business people because if someone from another state or country              
 who doesn't have an effective arbitration system encountered this,            
 they would be very reluctant to go ahead without getting attorneys            
 involved and then spending more money and delay.  He thought this             
 was a good concept but didn't feel Alaska was in the position to              
 lead this movement.                                                           
 Number 1717                                                                   
 CHAIRMAN ROKEBERG asked how someone would find themselves in a                
 dispute that would require resolution.  He asked if a letter of               
 credit denominated in a monetary amount might be disputed regarding           
 currency rates or asked for an example of any other dispute that              
 might be raised.                                                              
 MR. KURTZ responded that a typical dispute arises when the issuer             
 of the letter of credit refuses to pay out the money they agreed to           
 pay under this document because they feel they have not been given            
 the documentation in genuine form, say for example, if it's                   
 fraudulent.  It is required to be given before the money is                   
 released.  This relates to the forged document concept which is a             
 cause of a certain number of these disputes.  If it turns out that            
 the documentation is alright and the bank held the money for twenty           
 days, which it's not suppose to do under this bill version unless             
 a party says specifically they will not pay after the seventh day,            
 there have been problems with banks saying, "well, this looks                 
 awfully fishy to us.  We really don't want to pay you, but we don't           
 want to reject it yet...so we'll just take a few more days."                  
 Number 1816                                                                   
 CHAIRMAN ROKEBERG stated that, "so the forgery or somebody                    
 presenting themselves or misrepresenting themselves as an                     
 authorized party when in fact they weren't and then the institution           
 issuing the draft, if you will, of money to that person as a form             
 of forgery or embezzlement or something."                                     
 MR. KURTZ responded yes and pointed out a good example of what                
 happens is that suppose a party buys oil from Saudi Arabia, that              
 party relies on a letter of credit from a Saudi bank that is                  
 getting help in dealing with the transaction from a New York bank             
 and a question arises as to whether some of the documentation from            
 Saudi Arabia has been properly notarized.  This sounds like a                 
 simple thing, but there are a lot of false acknowledgments in the             
 Number 1880                                                                   
 CHAIRMAN ROKEBERG clarified that the form available for any                   
 conflict would be the typical judicial system.                                
 MR. KURTZ responded that this was correct.                                    
 Number 1905                                                                   
 REPRESENTATIVE RYAN stated that he had participated in some of                
 these trades and offered to give an example.  He pointed out cargo            
 ships on the ocean with valuable cargo such as wheat, oats, etc.              
 In the process of delivery a party cancels on the deal.  He then              
 proceeded to outline in detail the makeup of a transaction such as            
 this with contracts outlining how and when the goods will be                  
 delivered.  Along with any contracts for sale, a clause might be              
 added that if a dispute arises, it would spell out what laws would            
 govern.  He made a point of stating that terms of dispute                     
 resolution are written specifically into related contracts.  He               
 pointed out that he didn't see anything in the bill before the                
 committee which specifies how disputes would be resolved.                     
 MR. PETERSON noted that one of the points that's significant with             
 revisions to Article 5 is the reliance on the body of material                
 regarding the "customs and practices, this international body of              
 material that's developed by the International Chamber of Commerce            
 used in all countries."  He added that it's now referred to in this           
 Article as a fall back position, but he would imagine within this             
 body of materials there are such provisions dealing with such                 
 things as the forum, the procedures for dispute resolution, etc.              
 He thought this bill adequately takes care of this point.                     
 MR. PETERSON stated that this legislation related to proposed                 
 Section 45.05.108 and this is the National Conference of                      
 Commissioners on Uniform State Laws (NCCUSL) official comment                 
 pertaining to this section.  As mentioned previously, this is a               
 comment in single space that runs more pages than the section                 
 itself.  He noted that this was an indication of how much thought             
 went into this legislation.                                                   
 Number 2183                                                                   
 CHAIRMAN ROKEBERG stated that he wished to appoint a subcommittee             
 to review this legislation to be led by Representative Ryan and to            
 include Representatives Cowdery and Kubina.  He suggested that a              
 subcommittee could be convened if there was a compelling reason to            
 do so, but if Representative Ryan wished to do some further                   
 research and report back to the Chair, they could determine if a              
 subcommittee meeting is necessary.                                            
 REPRESENTATIVE COWDERY asked the subcommittee Chair to address the            
 problem of a bank being recognized by other banks.                            

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