Legislature(1997 - 1998)

10/20/1997 01:09 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
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.                       
                                                                               

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