Don’t Be Shut Out During a Government Shutdown [Secured Lender, The]

This July, the Minnesota state government shut down, putting halt to a variety of state services. In this increasingly turbulent economic climate, how likely is it that other states will face the same fate, and what are the possible implications on secured lending due diligence practices?

The 20-day Minnesota</location> state government shut down in July was the longest-lasting in U.S. history and it was the 7th state government shut down in the past eight years. In this increasingly turbulent economic climate, how likely is it that other states will face the same fate, and what are the possible implications on secured lendingdue diligence practices?

What Causes State Government Shutdowns?

The possibility of a shutdown arises during the period every two years when a state's budget faces renewal, and isa product of disputes over where and how changes in spending will be made. When astate has bifurcated executive and legislative branches with one political party as governor and another as majority in the House and Senate, that state runs the risk of clashes between the two parties. Parties may disagree over sales and income taxes, state service cuts and layoffs, or hot buttons such as healthcare- and, generally speaking, when the parties cant agree before the end of the legislative session, a shutdown will occur until an agreement is reached.

How Likely are Future State Government Shutdowns?

Simply from a historical perspective, it would not be surprising to see at least one more state shutdown in the next two years. Minnesota alone has shut down twice over the past six years, and, with both sides unhappy over the outcome of July's negotiations, some speculate we'll see a repeat in 2013.

Moreover, the federal debt crisis cou Id play a role in the propagation of this trend. The U.S. government's debt downgrade is expected to trickle down to some states' ratings, particularly those states that rely heavily on the federal government and related contracts. A downgrade in a state's bond rating could require tough budgeting decisions in the next legislative session, setting the stage for more disagreements over capital expenditures and cutbacks.

Potential Impact of a State Government Shutdown on Secured Lending Due Diligence Practices

When a state govern ment shuts down, there's always the potential of that state's Secretary of State's (SOS) office closing. A closure of the SOS would make it difficult fora secured party to make notice on the public record of its claim on collateral, as well as fora lender doing duediligence for a prospective loan to search the public record to find such claims.

However, there are steps a lender can take to mitigate these risks, both in advance of a pending shutdown and, to a lesser extent, during the closing if it has occurred.

Lenders, if you hear that a shutdown may occur, consider the following preemptive actions, all of which should be completed before the date of the shutdown:

* Review your portfolio for near-expiring liens, and file necessary continuations

* File any necessary amendments

* If you are currently in the due diligence stage for a prospective new loan, pre-file your UCC-i after obtaining authorization from the borrower; also conduct all necessary searches.

In the event of a shutdown:

* Submit paper filings via USPS; 9-516 of the Uniform Commercial Code provides that filing is constituted by communicating the record to the filing office and tenderi ng the filing fee; fili ngs delivered by the USPS may still be delivered in the event of a SOS closing.

* Conduct due diligence searches through a UCC service provid er that has a database of lien public records; that data would be somewhat outdated, but may be useful for preliminary due diligence.

By takingthese actions, you can control your level of potential risk when searching and filling on the state's public record.

Amanda N. Rasizzi is manager of marketing, UCC, with CT Lien Solutions. She is a frequent author on the UCC Article 9, and on public records search and filing best practices. For assistance from CT Lien Solutions with debtor due diligence, filing and life-of-loan risk management solutions, contact amanda.rasizzi@ worterskluwer.com.