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