The Senate Committee on Judiciary was called to order by Chairman Mark A. James, at 8:48 a.m., on Thursday, February 4, 1999, in Room 2149 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Senator Mark A. James, Chairman

Senator Jon C. Porter, Vice Chairman

Senator Maurice Washington

Senator Dina Titus

Senator Valerie Wiener

Senator Terry Care

COMMITTEE MEMBERS ABSENT:

Senator Mike McGinness (Excused)

STAFF MEMBERS PRESENT:

Jo Greenslate, Committee Secretary

OTHERS PRESENT:

Chairman James read the following bill draft requests (BDRs) and asked for a motion for committee introduction concurrently.

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Chairman James opened the hearing on Senate Bill (S.B.) 20.

Frank W. Daykin, former Legislative Counsel, National Conference of Commissioners on Uniform State Law (NCCUSL), explained that S.B. 20 combines the Uniform Prudent Investor Act and the second revision of the Uniform Principal and Income Act. The Uniform Principal and Income Act has been in existence since 1931 and was amended in 1962. Mr. Daykin stated the Uniform Prudent Investor Act is new, and its purpose is to broaden the permissible investments for fiduciaries (trustees or executors of estates) to any investment that a prudent person would make for his or her own account.

Continuing, Mr. Daykin remarked the Uniform Principal and Income Act modifies the handling of the return from investments both to reflect modern conditions and the greater breadth of permissible investments. He mentioned that section 3 is probably the most important part of the bill and states in effect: "If the trust or the will provides directions for the investment of an estate or for the handling of the income or principal or classifying them, those directions prevail." He added, if passed, S.B. 20 would only be operational if the instrument is silent on the point. Mr. Daykin pointed out that both acts have certain features in common, such as the one he discussed wherein they always defer to the instrument. Additionally, both share a duty of loyalty to the beneficiaries and to act impartially as between beneficiaries or classes of beneficiaries. Another point made by Mr. Daykin is that in prudent investment, there is a duty to diversify unless diversification is inappropriate to serve the purposes of the trust.

Senator Wiener referred to Mr. Daykin’s comment that the trustee has a duty to diversify as much as possible unless inappropriate, and inquired whether that would need to be specified by the deceased or if the family or beneficiaries could input information regarding that decision.

Mr. Daykin replied that the family or beneficiaries could input information; however, the settlor’s specifications, if present, would prevail. The trustee would have the primary duty to handle the investments, but would normally consult the beneficiaries beforehand.

Chairman James requested clarification of the principal and income provisions of the bill, both how they operate and the interplay between those and the tax consequences.

In response, Mr. Daykin remarked that the basic question that the Uniform Principal and Income Act endeavors to answer is what the trustee is to do with the money he or she receives from an investment. He asked, "Is it to be treated as principal and added to the principal of the trust or treated as income and distributed to whoever is entitled to the income?" Mr. Daykin mentioned that capital gains are normally considered as principal.

An important safety valve of the act, according to Mr. Daykin, is covered in section 18 of S.B. 20. It gives the trustee discretion to make adjustments between principal and income if he or she believes the result is partial to one or the other set of beneficiaries.

Senator Wiener inquired whether this bill would affect an estate currently being settled.

Mr. Daykin answered that S.B. 20 has an effective date of October 1, 1999, and would affect both trusts that have already been established as well as estates that are still open as far as the income and principal portion of the act. He continued there are special provisions concerning interim distributions by the estate, when an income interest ends, and so forth. Mr. Daykin pointed out that section 16, subsection 3 states, "’Fiduciary’ includes an executor, administrator, successor, personal representative, special administrator, and a person performing essentially the same function." He noted that a trustee is also a fiduciary and unless it is specified that only a trustee may do something, where it states a "fiduciary" in the Uniform Principal and Income Act, it is covering executors and the like.

Addressing the tax consequences of S.B. 20, Mr. Daykin testified that they are covered in section 18, subsection 3, paragraphs (e) and (f). Paragraph (e) delineates one of the circumstances under which the trustee may not exercise his or her discretion to make an adjustment between the principal and income. Continuing, Mr. Daykin read paragraph (f) and stated the power to make the adjustment vanishes under the circumstances included in that paragraph.

Mr. Daykin mentioned that section 44 of the bill contains a separate provision of the fiduciary, including the executor, wherein:

Continuing, Mr. Daykin also referred to section 44, subsection 2, which is a long section on charitable deductions that may be made from income or principal and how those are handled. According to Mr. Daykin, an example of the versatility of S.B. 20 is section 38 on "asset-backed security."

Senator Porter queried how many other states have a similar law and for what length of time.

Mr. Daykin responded that almost all of the states have a principal and income law, and some still have the one that was established in 1931. More have the 1962 version, including Nevada. According to Mr. Daykin, S.B. 20 was drafted because NCCUSL thought it appropriate to restudy the subject for two reasons; new kinds of investments, and the difference in the way that current market investments are made. He said it is no longer necessarily convenient to divide the investments of a trust into things that will produce enough income and things that the investor hopes will keep up with inflation and keep the principal up with the same purchasing power.

Responding to a question by Senator Porter, Mr. Daykin affirmed that there are states that will be adopting language similar to S.B. 20.

Chairman James pointed out that the two acts have intertwining provisions and inquired whether they are generally enacted together. Mr. Daykin answered affirmatively and said that is the reason that he combined the two into one bill for Nevada.

In response to Chairman James’ inquiry as to whether passage of S.B. 20 will overturn decisions by the Nevada Supreme Court in interpreting the 1962 law, Mr. Daykin replied it will not because it does not depart radically from any provision of the 1962 act. Rather, it enlarges the 1962 law and goes into more detail with respect to some categories such as water and timber, and it addresses new things that were not around in 1962. Further, Mr. Daykin remarked S.B. 20 gives more discretion to the trustee, and inclusion of more detail could lessen litigation in the future. Mr. Daykin affirmed a comment by Senator Care that a prudent investor could be an investor that loses money.

There being no further testimony on the bill, Chairman James closed the hearing on S.B. 20 and opened the hearing on S.B. 62.

John P. Sande III, Lobbyist, Nevada Bankers Association, introduced Alan B. Rabkin, Senior Vice President/General Counsel, SierraWest Bank.

Mr. Rabkin testified on the modernization of Article 9 of the Uniform Commercial Code (UCC). He distributed an article from Clarks’ Secured Transactions Monthly, Volume 14, No. 5, titled "Special Report: New Article 9" (Exhibit C).

According to Mr. Rabkin, Article 9 has been in the UCC relatively unchanged since the 1960s. Cleanup over the years has been spotty, and most of the changes have occurred by case law. The new revised Article 9 incorporates settled law into the code. Secondly, Article 9 has been expanded to include less tangible items such as a broadening of the definition of "accounts receivables." An example given by Mr. Rabkin was that the new Article 9 allows a lender to lend to a physician and take an expectancy from an insurance company and factor the receivables of the physician.

Mr. Rabkin stated that the summary (Exhibit C) covers the high points of the broadening of Article 9. He surmised that expansion of Article 9 helps consumers, debtors, and lenders by giving a larger array of potential collateral that can be pledged for loans, and in return the banks and financiers can look to a larger realm of collateral against which they can lend.

The third area addressed by the new Article 9, according to Mr. Rabkin, is the entrance into the electronic age. He advised that Articles 5 and 8 dealing with investments, securities, and letters of credit, have already been modernized for electronic purposes. Additionally, Articles 3 and 4, negotiable instruments and the sections dealing with checks, have been modernized; and Article 2, dealing with the sales area, is currently being modernized.

Mr. Rabkin further testified that Article 9 is being updated for the electronic era by streamlining the process of perfecting an interest in personal property by means of an electronic filing method. Mr. Rabkin explained that the electronic filing capability first saves the lender’s place in the line of perfected collateral, then enables the lender to make the loan instantaneously, and finally allows the lender to follow up with the perfection after the fact.

Concluding, Mr. Rabkin remarked that this is the only area of Article 9 that is being modernized for electronic filing. He said this upgrade has been designed more to a front-end electronic expediency rather than a back-end electronic expediency.

Senator Washington requested clarification of the last sentence beginning on the first page of Exhibit C that reads: "This should bring more transactions out of the realm of "common-law liens" and into the more predictable framework of the UCC."

Mr. Rabkin replied the new expanded Article 9 recognizes statutory-type liens as coming within the system. He gave an example of common-law liens such as a banker’s right to set off on an account if the loan payments are not made. One day the loan may be delinquent, and the next day the debtor’s bank account may have a zero balance. Mr. Rabkin advised that to remove the guesswork and to have a well defined, up-front agreement with the bank, a statutory lien should be pursued under the procedures of the new Article 9 rather than a common-law lien.

Mr. Rabkin remarked that the last area modernized was foreclosure of collateral, and that aroused consumer interest. He mentioned a practice in the past of mass-marketing department stores taking unfair advantage of certain consumer debtors in the bankruptcy court by getting them to sign pre-agreed reaffirmation agreements of their, for instance, washer-dryer purchases. This problem arose when streamlined efforts were being made to create a more rapid method of foreclosing Article 9 rights. Mr. Rabkin asserted that, if anything, S.B. 62 will strengthen consumer rights.

In the business commercial area, Mr. Rabkin commented little has changed except S.B. 20 offers a better definition of a commercially reasonable sale, and a procedure for selling collateral in a business situation has been brought into statute from case law.

Mr. Rabkin stated the NCCUSL would like to see adoption of S.B. 62, preferably by sometime during year 2000, and no later than year 2001 so as to stay in tandem with other commercial interests throughout the country. He added that the opinion of those in the banking industry is that there will be a rapid adoption of the new Article 9 in the "commercial states," meaning the coastal states and states such as Texas and Illinois.

In response to a question by Chairman James, Mr. Daykin answered that the uniform Article 9 first became effective in Nevada as part of the Uniform Commercial Code which was enacted by the 1965 Legislature, but did not become effective until July 1, 1967.

Scott W. Anderson, Deputy Secretary, Commercial Recordings Division, Office of the Secretary of State, remarked the secretary of state does not oppose S.B. 62. Mr. Anderson did mention, however, that the Office of the Secretary of State has concerns regarding implementation and filing procedures and would like to meet with Mr. Rabkin and Mr. Daykin to discuss the bill. According to Mr. Anderson, the implementation date of January 1, 2001, as stated in the statute, will have a fiscal impact this biennium on the Office of the Secretary of State in preparing processes and technologies necessary to implement the statute.

Responding to a question by Chairman James as to whether the secretary of state’s office agreed to the substantive provisions of S.B. 62, Mr. Anderson replied it does have concerns regarding a few of the provisions as far as the information requested or not requested on the "UCC-1 Form." He continued the secretary of state’s office has no problem with electronic filing and is in the process of gearing up to accept any and all filings in that office over the Internet or other electronic means. Mr. Anderson agreed to meet with Mr. Rabkin and Mr. Daykin before the committee meeting on Friday, February 12, 1999.

Seeing no further testimony, Chairman James closed the hearing on S.B. 62. There being no further business to come before the committee, the meeting was adjourned at 9:55 a.m.

RESPECTFULLY SUBMITTED:

Jo Greenslate

Committee Secretary

APPROVED BY:

Senator Mark A. James, Chairman

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