75(R) HB 1560 House committee report

BWM H.B. 1560 75(R)BILL ANALYSIS


FINANCIAL INSTITUTIONS
H.B. 1560
By: Smith
3-14-97
Committee Report (Unamended)



BACKGROUND 

Chapter 5 of the Texas Business and Commerce Code (Article 5 of the
Uniform Commercial Code) deals with the rights and obligations created by
a letter of credit.  A letter of credit is a definite undertaking by an
"issuer" to a "beneficiary" to make a payment upon the  beneficiary's
presentation of the documents listed in the issuer's undertaking.   

Letters of credit are used to assure the creditworthiness of the persons
required to obtain them. Letters of credit typically are issued by a
financial institution at the request of a customer who pays a fee and
engages to reimburse any payments made by the issuer under the letter of
credit to a person to whom the customer is obligated in an underlying
transaction.  The underlying transactions in which letters of credit are
used vary greatly, ranging from the purchase of goods to the lease or sale
of real estate.  There are two basic types of letters of credit: (1)
commercial letters of credit and (2) standby letters credit.  Commercial
letters of credit, which primarily are utilized to finance the purchase of
goods, are distinctive in that a beneficiary is expected to be paid in the
underlying transaction by drawing upon the letter of credit.  On the other
hand, a beneficiary is expected to draw upon a standby letter of credit
only if the obligor in the underlying transaction defaults.  Standbys are
the most common type of letters of credit. 

In 1967, Texas enacted the initial version of Article 5 of the Uniform
Commercial Code.  This enactment was in the exact form recommended by the
American Law Institute and the National Conference of Commissioners on
State Laws, the official sponsors of the Uniform Commercial Code.  The
only Texas amendments occurred in 1995.  These amendments were recommended
by the official sponsors of the Uniform Commercial Code and also were
adopted without nonuniform amendments.   

For example, under the Independence Principle, a fundamental of letter of
credit law, an issuer's rights and obligations with respect to a
beneficiary are independent of the arrangement that gave rise to the
letter of credit.  Present Texas Article 5 does not mention the
Independence Principle, but Texas case law adheres to this principle; the
proposed amendments expressly codify it and prohibit its waiver.
Similarly, present Texas Article 5 is inconsistent with key aspects of the
Uniform Customs and Practice for Documentary Credits, or UCP, that are
incorporated into most letters of credit; whereas, the proposed amendments
conform Article 5 to UCP substantive rules that have gained widespread
acceptance and allow express incorporation of the UCP to waive all but a
handful of Article 5 provisions.  Finally, present Texas Article 5
requires that a letter of credit be in writing; whereas, the proposed
amendments also permit a letter of credit to be issued electronically, in
keeping with modern commercial developments.     

PURPOSE

This bill revises the Texas enactment of the initial version of Article 5,
as amended in 1995, with a series of amendments recommended by the
American Law Institute and the National Conference of Commissioners on
Uniform State Laws.  The purpose of these amendments is to enhance the
commercial acceptability of letters of credit.  The amendments both
clarify the legal obligation of issuers to pay promptly and harmonize
Texas law with modern commercial practices with respect to letters of
credit, including the increasing use of electronic communication. 

 RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not expressly grant any
additional rulemaking authority to a state officer, department, agency or
institution. 

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Chapter 5, Business & Commerce Code.
 Sec. 5.102. Definitions.
 Sec. 5.103.  This section currently is  5.102.  The new provisions in
Subsections (c) and  (d) codify the Independence Principle and prohibit
waiver of core Article 5  concepts, like the definition of letter of
credit and the Independence Principle. 
 Sec 5.104.  The revision of this section permits a letter of credit,
amendments to and  cancellations of a letter of credit, and other
communications with respect to a  letter of credit to issued in any form
that is an authenticated "record".  The   5.102(a)(14) definition of
"record" includes information stored in an electronic  or other medium
that is retrievable in perceivable form as well as a traditional  writing.
 Sec. 5.105.  This section continues the rule that no consideration is
required to issue,  amend, transfer, or cancel a letter of credit.
Present  5.105 contains the same rule. 
 Sec. 5.106.  This revision of  5.106(a) adopts the UCP rule that a letter
of credit is  irrevocable unless the issuer expressly has reserved the
privilege to revoke.  New   5.106(c)&(d) provide that a letter of credit
without an expiration date expires in  one year as a matter of law and
that a letter of credit stating that it is "perpetual"  expires in five
years as a matter of law. 
 Sec. 5.107. This new provision states an ordinary nominated person and an
adviser are  not obligated to honor or otherwise to give value under a
letter of credit.     
 Sec. 5.108.  This section combines provisions currently appearing in
  5.109, 5.112 &  5.114.  Present  5.108 dealing with "notation credit" is
deleted as obsolete. 
   5.108(a)&(e) codify the present case law requirement that a
presentation on its  face must strictly comply with the terms and
conditions of a letter of credit to be  entitled to honor and provide that
strict compliance is to be determined according  to the standard practice
of financial institutions that regularly issue letters of  credit.
 5.108(b)-(d) adopt the UCP rules that, absent a special agreement, the
reasonable time allowed an issuer to determine whether to honor or to
dishonor a  presentation can not exceed seven business days following the
day of presentation,  and strictly precluding an issuer from justifying
dishonor with most discrepancies  of which timely notice is not given to a
presenter. 
 Sec. 5.109.  This revision of current  5.114(b) deals with documents that
are forged or  materially fraudulent. 
 Sec. 5.110.  This section currently is  5.111.  The revision clarifies
that warranties are not  given by a beneficiary unless a presentation of
documents has been honored. 
 Sec. 5.111.  This section currently is  5.115.  The revision omits the
unnecessary cross reference to damages recoverable under UCC Article 2 on
Sales of Goods. 
 Sec. 5.112.  This section currently is  5.116(a), which also requires
that a letter of credit  state that it is transferable for a beneficiary's
right to demand honor to be capable  of voluntary transfer. 
 Sec. 5.113.  This section permits a "successor of a beneficiary", who
succeeds to    substantially all of a beneficiary's rights by operation of
law, to sign and present  documents and to receive payment either in the
name of the beneficiary or in its  own name. 
 Sec. 5.114.  This section currently is  5.116(b).  New provisions defer
to UCC Article 9  on Secured Transactions with respect to the creation and
perfection of a security  interest in a beneficiary's right to the
proceeds of a letter of credit. 
 Sec. 5.115.  This new provision imposes a one year statute of limitations
upon actions to  enforce rights and obligations arising under UCC Article
5 on Letters of Credit. 
 Sec. 5.116.  This new provision deals with the law applicable to UCC
Article 5 disputes,  including the general primacy of UCC Article 5 over
UCC Articles 3 on    Commercial Paper, 4 on Bank Deposits and Collections,
4A on Funds Transfers,  and 9 on Secured Transactions. 
 Sec. 5.117.  This new provision states that the Independence Principle
does not prevent  an issuer, an applicant, or a nominated person that has
paid value under a letter of  credit from being subrogated to the rights
of the person paid. 

SECTION 2  This conforming amendment to UCC Article 1 on General
Provisions makes a  cross-reference to  5.116. 

SECTION 3  This conforming amendment to UCC Article 2 on Sales of Goods
corrects a cross reference to refer to the appropriate provision in the
UCC Article 5 amendments. 

SECTION 4 This conforming amendment to UCC Article 9 on Secured
Transactions subjects  security interests in rights to the proceeds of
written letters of credit to the "last event"  
 rule.

SECTION 5 This conforming amendment to UCC Article 9 on Secured
Transactions limits  coverage of Article 9 to transfers of rights to the
proceeds of written letters of credit. 

SECTION 6 This conforming amendment to UCC Article 9 on Secured
Transactions adds  cross references to the new definitions of letter of
credit and proceeds of a letter of credit . 

SECTION 7 This conforming amendment to UCC Article 9 on Secured
Transactions    designates a beneficiary's right to the proceeds of a
written letter of credit to be Article 9  general intangible collateral. 

SECTION 8 These conforming amendments to UCC Article 9 on Secured
Transactions make  UCC Article 9, rather than UCC Article 5, deal with the
creation and perfection of a  security interest in a beneficiary's right
to the proceeds of a letter of credit. 

SECTION 9 Effective date: September 1, 1997.

SECTION 10 This nonretroactive provision states that the amendments will
apply only to letters  of credit that are issued on or after the effective
date.  The former law will be continued  for letters of credit issued
before the effective date. 

SECTION 11 Emergency clause.