Suppose that you’ve finally found a buyer for that used piece of construction equipment that you’ve been trying to sell for months. While the buyer is interested, it can’t afford to purchase the equipment outright with a single cash payment. Rather, the buyer is seeking to finance the transaction with payments over time at the appropriate interest rate. You’re agreeable to the repayment structure, but want to provide yourself additional protection in the event that the buyer is unable to make the payments in whole. You want to use the equipment itself as collateral for the repayments so that you’ll be able to seize and sell the equipment in the event of nonpayment by the buyer. Congratulations, you’ve just become a creditor in a secured transaction.

One of the most important elements of being a creditor in a secured transaction is the filing of the financing statement. After agreeing to the payment terms, and entering a security agreement for the collateral, the creditor must file a UCC-1 financing statement in the appropriate state office in order to “perfect” the security interest in the collateral. This financing statement acts as a notice to all third parties that this collateral is already subject to a security interest and that an existing creditor may have a right to seize and sell the collateral. Furthermore, the appropriate financing statement is absolutely vital to protect the creditor’s interest in the event of the debtor’s bankruptcy.

While seemingly a straightforward requirement, one of the frequently overlooked issues in filing the financing statement is choosing the right state office in which to file. What if the buyer in the used equipment situation above is a company registered in Pennsylvania, but has its principle corporate office in Delaware? Further, what if the buyer arranged to buy the equipment through one of its smaller Ohio offices for use only in projects in West Virginia? In which state should you file? Do you have to file in multiple states? These questions are important because if the financing statement is not correctly filed the creditor may lose all of its interest in the collateral in the event of debtor’s bankruptcy and receive nothing in payment.

Prior to 2001, the prudent course may have been to file in all four states simply out of caution. Before 2001, Article 9 of the Uniform Commercial Code, which governs secured transactions, based financing statement filings primarily on the “location of the collateral.” While simple in theory, as the example above shows in practice this can be nightmarish. Parties frequently conduct business across state lines, with companies organized in different states and with collateral moving through multiple states. It becomes difficult, if not impossible, to determine where collateral may be primarily located. Even provisions of the UCC that attempted to deal with mobile collateral often proved unworkable. Creditors were forced to spend time and money filing in multiple states simply out of a precaution due to this uncertainty.

Thankfully, the 2001 revisions to Article 9 simplified the approach. Instead of focusing on the location of the collateral, the 2001 revisions placed the emphasis on the location of the debtor. Instead of chasing collateral through multiple states, the creditor only needs to look for the location of the debtor. For debtors that are registered entities, their location is simply the state in which the debtor is incorporated. In the above example, because the buyer is registered in Pennsylvania, the only financing statement necessary would be filed with the Pennsylvania Department of State. The creditor is saved from the long hassle of untangling and estimating where collateral may be deemed to be “located.”

While the analysis can become slightly more complex for debtors that are unorganized entities such as partnerships, for individuals, or for debtors which are foreign entities, the approach still focuses on the location of the debtor instead of the collateral. While there are additional steps to correctly perfecting a security interest, the state in which to file the financing statement has been revised with an eye towards practicality. In the time since revision this approach has proven to be invaluable as creditors are able to more readily determine where the financing statements need to be filed and are able to ensure that their interests are fully protected without unnecessary complication.