Under current law, the issuer may generally refuse to honor a letter of credit
that is forged or fraudulent, as long as the demand for payment under the letter of
credit is not made by an innocent third party. Current law does not specify who must
perpetrate the fraud or how serious the fraud must be before the issuer may refuse
to honor. This bill narrows the right of an issuer to refuse to honor a letter of credit
by authorizing the issuer to refuse to honor, if the fraud is material and is either in
the documents or perpetrated by the beneficiary on the issuer or applicant. In
addition, this bill clarifies that the issuer may defend its refusal to honor by proving
this type and degree of fraud or forgery. The bill continues to require an issuer to
honor a letter of credit when an innocent third party demands payment, despite the
existence of material fraud by the beneficiary.

Current law allows an applicant to obtain an injunction against an issuer that
the applicant has notified of material fraud. However, Wisconsin's version of UCC,
article 5, currently provides no standards for courts to apply in determining whether
an injunction is appropriate. This bill specifies four conditions that the applicant

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must meet in order to obtain an injunction, including a showing that the applicant
is more likely than not to succeed under its claim of forgery or material fraud.

Under current law, a beneficiary that transfers or presents a demand for
payment warrants to all interested parties that the necessary conditions of the letter
of credit have been met. In addition, current law establishes a limited warranty
when the issuer or various intermediaries present or transfer a demand for payment.
This bill generally restricts the warranties applicable to a letter of credit. This bill
repeals the provisions for warranties given by an issuer or intermediary, except to
the extent that an issuer or intermediary is also a beneficiary. Furthermore, this bill
narrows the type and application of a beneficiary's warranties. To the issuer, the
applicant, and any other person to whom the beneficiary presents documents under
a letter of credit, the beneficiary warrants that it has not committed material fraud
and that the documents presented are not forged. To the applicant, the beneficiary
warrants that the payment demanded does not violate any agreement between the
applicant and the beneficiary or any other agreement the parties intended to be
augmented by the letter of credit. In addition, this bill changes the time when a
beneficiary's warranties become effective from the date of the beneficiary's
presentation of documents to the date on which the presentation is honored. Thus,
this bill eliminates the possibility that an issuer may claim the beneficiary's breach
of warranty as a basis for refusing to honor a letter of credit.

Under current law, when an issuer wrongfully dishonors a demand under a
letter of credit, the person entitled to honor may sue for the amount of the demand,
incidental damages, and interest, minus the proceeds of any resale or other use of the
subject matter of the transaction. In addition, when an issuer wrongfully cancels a
letter of credit before being presented with a demand for payment, the beneficiary
may sue for wrongful dishonor, if the beneficiary has prepared the documents
necessary to make a demand under the letter of credit. If the beneficiary has not
prepared the necessary documents, the beneficiary may sue for anticipatory breach
of contract.

This bill expands the available remedies for anticipatory breach of contract to
include specific performance. In addition, under this bill, if an issuer wrongfully
cancels a letter of credit before being presented with a demand for payment, the
person presenting the demand need not take action to avoid damages. Furthermore,
unlike current law, this bill specifies incidental damages as the typical remedy for
an adviser or nominated person's breach of an obligation under UCC, article 5, and
for an issuer's wrongful dishonor or wrongful payment of a demand, in breach of its
obligations to the applicant. Contrary to current law, this bill requires a court to
order payment of the prevailing party's reasonable attorney's fees. In addition,
unlike current law, the court must order payment of the prevailing party's expenses
of litigation. This bill also clarifies that the parties may set a reasonable amount of
damages by contract, payable in the event of breach.

Under current law, a beneficiary may not transfer its right to demand
performance under a letter of credit, unless the letter of credit provides that it is
transferrable. This bill retains this restriction on a beneficiary's transfer of the right
to demand performance under a letter of credit. Furthermore, under this bill, even
if the letter of credit is transferrable, the letter of credit may impose conditions of
transfer or the issuer may impose reasonable requirements consistent with the
standard practice of financial institutions that deal in letters of credit. Except for
requiring a beneficiary to comply with applicable law, this bill does not specify the
conditions or requirements a beneficiary must fulfill in order to transfer its rights to
demand payment.

Under this bill, a successor beneficiary may consent to amendments, sign and
present documents, and receive payment under a letter of credit, either in its own
name as a successor or in the name of the original beneficiary. However, if the
successor discloses its status as a successor beneficiary, the issuer generally may
require the successor to meet certain requirements consistent with the standard
practices of financial institutions that deal in letters of credit. For example, the
issuer may require the successor beneficiary to present a certificate of merger or
certificate of appointment as bankruptcy trustee before the issuer will recognize the
transfer. Furthermore, any confirmer or nominated person may decline to recognize
the presentation required by the issuer. Current law does not contain provisions
specifically regarding transfer of a beneficiary's rights by operation of law.

Under current law, a beneficiary may assign its right to receive payment under
a letter of credit, as long as the beneficiary delivers the letter of credit or advice of
the letter of credit to the assignee. The issuer may continue honoring demands for
payment under the letter of credit until it receives adequate notification of the
assignment. After receiving notification and in order to avoid double payment, the
issuer may stop honoring demands until the assignee shows the issuer the letter of
credit or advice.

This bill clarifies that the assignment of proceeds of a letter of credit is different
from a transfer of the right to demand payment under a letter of credit. Unlike after
a transfer, the beneficiary retains the right to demand payment under the letter of
credit after an assignment. It is that payment, or a portion of it, that the beneficiary
assigns to a third party. Also, under this bill, an issuer or nominated person may
refuse to honor an assignment of proceeds until the issuer or nominated person
consents to the assignment. However, an issuer or nominated person generally may
not unreasonably withhold this consent. Furthermore, this bill clarifies that an
assignee's rights are subordinate both to the rights of a transferee beneficiary and
to the rights of a nominated person.

This bill restricts the potential scope of UCC, article 5, by clarifying that the
article does not apply to a guaranty or surety agreement. Furthermore, unlike

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current law, this bill provides that an applicant and an issuer generally may agree
to vary from the requirements of UCC, article 5, in establishing their obligations to
one another, with certain exceptions. However, an issuer may not vary its obligations
to an applicant simply by inserting a boilerplate disclaimer or limitation of remedy
clause in the parties' agreement.

Under current law, the parties to a transaction under UCC, article 5, generally
may agree which state's law applies when the transaction is reasonably related to
both Wisconsin and another state or nation. If the parties make no agreement, then
the laws of Wisconsin apply, as long as the transaction bears a reasonable relation
to this state.

This bill expands the ability of parties to choose what law will apply, in certain
circumstances. Under this bill, if the issue is the liability of a nominated person,
issuer, or adviser, but not an applicant, the parties may choose the law of any state
regardless of that state's relation to the transaction. If the parties do not agree, then
the law of the jurisdiction where the issuer, nominated person, or adviser subject to
the action is located applies. In addition, this bill allows for further development of
commercial practices by providing that a rule of practice or custom that is
incorporated into a letter of credit will govern the issue of a nominated person's,
issuer's, or adviser's liability, if the rule or custom conflicts with certain provisions
of UCC, article 5.

Current law is silent as to whether and when an applicant, issuer, or nominated
person may assume the rights of another party to a letter of credit transaction in the
event of breach. Because the letter of credit is independent of the underlying
transaction between a buyer and a seller, some courts have held that this right of
subrogation does not exist. This bill does not grant a right of subrogation. However,
this bill clarifies that an applicant, issuer, or nominated person seeking subrogation
has the right that would exist if the person seeking subrogation were a guarantor,
surety, or other secondary obligor. Furthermore, this bill requires a party to perform
under a letter of credit before it may assert a right of subrogation. Thus, the bill
prevents a party from using subrogation to avoid the duty to honor a letter of credit.

This bill eliminates certain sections of Wisconsin's version of UCC, article 5, as
obsolete or covered by other law. For example, this bill deletes the section currently
dealing with notation letters of credit and allows the parties to a letter of credit to
determine by contract whether they must follow requirements similar to those
contained in that section. This bill also eliminates the current section on indemnity
agreements in letter of credit transactions, leaving the parties to rely on existing
contract and indemnity law. In addition, this bill eliminates the current section
dealing with bank insolvency because insolvency issues are covered by other law.

Although the current UCC, article 5, is silent with regard to a statute of
limitations for actions brought under that article, the general six year statute of
limitations for breach of contract would likely apply. This bill shortens the statute

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of limitations by requiring a party to commence an action within one year after the
later of the date the letter of credit expires or the date the breach occurs.

This bill makes certain changes to definitions applicable to UCC, article 5, and
to the formal requirements of a letter of credit. These changes generally validate
current commercial practices and allow for further expansion of the use of letters of
credit in commercial transactions. The bill does not affect current law regarding the
security interests of issuers of letters of credit or nominated persons.