Due to a budget impasse between Minnesota's legislative and executive branches, state government services that are not deemed to be "essential" may be shut down at 11:59 p.m. on June 30, 2011.  This impending shutdown would have a significant detrimental impact on certain legal-related services in Minnesota.  As of the time of this alert, if the shutdown occurs, we expect that many state agencies, including the Office of the Secretary of State, the Department of Transportation and the state courts, may be closed or provide reduced services.  We are unable to estimate how long the shutdown would last (although some commentators have suggested that the shutdown may last weeks or even months) and recommend planning for a shutdown of indefinite duration.

A summary of the possible impact of those closures and reductions in service follows.  If you have any further questions regarding the items included in this alert or any other aspects of the shutdown, please contact any of us at Faegre & Benson LLP.

Business Entities

The Office of the Secretary of State receives and processes documents for entities organized in Minnesota that are required to complete many of the most fundamental events in an entity's existence, including initial organization, amendments to governing documents, mergers and dissolutions, among others.  If the Office of the Secretary of State is closed, these filings will not be processed, and entities organized in Minnesota will be unable to effect any of these fundamental events.  In addition, it will not be possible to receive good standing certificates for Minnesota entities.

We also expect that if a shutdown occurs, the website maintained by the Office of the Secretary of State will be shut down.  Therefore, it will not be possible to conduct entity searches or to view other information relating to Minnesota entities that is typically available on the website.

If possible, we advise accelerating any entity-related events that require filings so that they occur before June 25, which will allow time to file the applicable documents with the Office of the Secretary of State, and for the Office of the Secretary of State to process the filings, before the shutdown.

Financing Transactions

The Office of the Secretary of State also receives, processes and maintains UCC financing statements.  If the shutdown occurs, UCC financing statements will not be processed and access to information relating to financing statements will not be available. 

The UCC does not provide for any extensions of time on account of government shutdowns. Accordingly, we recommend taking action on any pending transactions as early as possible, and in any event before the shutdown. We expect the Secretary of State's office to be quite busy in the coming weeks, and there is no assurance that search requests will be fulfilled or date-stamped copies of filings returned during the days before the shutdown.

The actions we recommend taking as early as possible include:

  • Obtaining authorization from prospective borrowers to pre-file financing statements before closing, and making such pre-filings.
  • Ordering UCC and tax lien searches for pending transactions.
  • Filing continuation statements for financing statements that may lapse. A continuation statement may be filed at any time within 6 months before each 5-year anniversary of the original filing.  

Courts

The governor has recommended that in the event of a government shutdown, the judicial branch should remain open, except for the Tax Court and the Office of Administrative Hearings.  The governor has further recommended that public defenders, guardians ad litem and judicial standards boards should remain open.  The state Judicial Council (which is the administrative policy-making authority for the judicial branch) has conducted meetings to decide what the courts will do if the court system's budget runs out.  No plans have yet been announced.  We do not yet know how court funding issues will play out, or whether the governor's recommendation to keep the judicial branch open will be followed.

State-Funded Projects

It is likely that the state will not disburse state funds for some projects that currently receive funding from the state, even if the failure to disburse funds results in a default by the state.  Examples of these projects include real estate and infrastructure projects.  This could lead to project funding being out of balance and a cascade of defaults by the party receiving state funding for the project. 

We recommend that if you are currently engaged in a state-funded project, you should determine whether the financing will be disbursed after June 30 and, if not, whether there are other sources of financing readily available that could be used to replace the state funding.  If there are not any other sources of financing, you should review the obligations arising under your project and discuss the possibility of a default by the state with other participants in the project.

Real Estate

Most real estate filings occur at the county level, and we currently expect that the state government shutdown will not affect these filings.  We also understand that zoning and other municipal and county governmental approvals should not be materially affected.  There is the possibility, however, that reductions in aid to county and municipal governments from the state could cause staffing reductions at those levels, which could impact real estate services.

We expect that those limited real estate filings that are done at the state level will be unavailable during the shutdown. 

Construction

The impending government shutdown will also affect the state's construction projects.  If the shutdown occurs, Minnesota will suspend work on state-funded projects, including all highway and bridge projects, as well as work on Washington Avenue for the Central Corridor light rail and various biomedical buildings throughout the state.  Contractors will be forced to stop work by no later than July 1.  All materials and equipment will need to be safely secured or removed from the site and all workers will be precluded from further work at the site.  Contractors will also not be paid during the shutdown.

Contractors should consider taking a number of measures to reduce the impact of a shutdown.  Contractors, for instance, should begin making arrangements to move their equipment from the job sites prior to July 1 because, according to the Minnesota Department of Transportation, wide-load permits will not be granted during the shutdown.  Contractors should also promptly submit their invoices for recently performed work and attempt to receive payment for any outstanding invoices in advance of July 1 because no further payments will be issued until work resumes on the projects. 

Before executing any new subcontracts and purchase orders on state-funded projects, contractors should consider including provisions that address the possibility of a government shutdown.  For instance, contractors will want to limit the amounts owed to subcontractors or suppliers in the event of a delay.  We typically recommend a provision stating that the subcontractors' and suppliers' claims are limited to the amounts recovered by the contractor from the state on their behalf.  Contractors will also want to include a provision stating that the subcontractors and suppliers must give notice of their claims to the contractor at least three days in advance of the time that the contractor is required to give notice of such claims to the state. 

Contractors should also be sure to carefully track the additional expenses incurred as a result of the suspension.  Once work resumes, contractors will want to consult their contracts with the state to determine the amount of additional compensation they are owed to cover the costs of the delay.  Contractors should pay particular attention to the deadlines required for giving notice of their claims so as not to waive their right to seek additional compensation.  Indeed, in some instances, contractors may only have seven days to give notice of their claim once work resumes.

Other Permits

The state agencies that issue permits in various areas, such as the Department of Natural Resources and Minnesota Pollution Control Agency, will also likely be closed or offer reduced services.  New permits issued by these agencies are therefore unlikely to be available or will take longer to issue.  In addition, the reductions in aid to local governments could impact the ability of those governments to issue permits.