Legislature(1997 - 1998)

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

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