## Facts

- Equitable Financial Management, Inc. operated an equipment-leasing business that financed equipment purchases through Colonial Pacific Leasing Company (Colonial).
- For each transaction, Equitable and an end-user executed a lease agreement and an equipment schedule; together, these records constituted chattel paper under UCC Article 9.
- Colonial financed the transactions in exchange for a security interest in the leases and the underlying equipment.
- Colonial did not file a financing statement; it relied on perfection by taking possession of the original, executed chattel paper.
- For two leases (including Eachles and Coors/RMS), Equitable retained additional versions in its files, including incomplete drafts, unsigned forms, documents with missing or inconsistent dates, and photocopies.
- Equitable filed Chapter 11 on March 15, 1991, and the case converted to Chapter 7 on May 16, 1991.
- The Chapter 7 trustee sued Colonial in an adversary proceeding, asserting Colonial’s security interest was unperfected because Equitable retained “original” chattel paper.
- After a bench trial, the bankruptcy court issued findings of fact and conclusions of law on whether Colonial was perfected as of the petition date.

## Issues

1. Whether Colonial perfected its security interest in the leases and equipment by possession of “original” chattel paper under UCC Article 9.
2. Whether Equitable’s retention of incomplete or inconsistent lease-related documents meant Colonial lacked exclusive possession of the original chattel paper, rendering the security interest unperfected and avoidable by the trustee.

## Decision

- The court held Colonial’s security interest was perfected as of the bankruptcy petition date.
- The documents retained by Equitable were not “original” chattel paper because they were incomplete, not fully executed, inconsistent, or merely photocopies.
- Because Colonial possessed the operative, executed originals, its perfection by possession was not defeated.
- The trustee could not avoid Colonial’s security interest under the trustee’s strong-arm powers.

## Legal Principles

- Chattel paper consists of records that evidence a monetary obligation and a lease or security interest in specific goods; related documents may be read together to determine chattel-paper status.
- A security interest in chattel paper may be perfected by possession of the original chattel paper rather than by filing a financing statement.
- Perfection by possession is not defeated by the debtor’s retention of non-operative materials (e.g., drafts, unsigned forms, incomplete versions, or photocopies) that do not constitute enforceable “original” chattel paper.
- A bankruptcy trustee exercising avoidance powers as a hypothetical lien creditor cannot avoid a security interest that was perfected as of the petition date.

## Conclusion

The bankruptcy court upheld Colonial’s perfected security interest because it possessed the executed, operative chattel paper, and the debtor’s retained drafts or photocopies were not competing “originals” capable of defeating perfection by possession.


In re Equitable Fin. Mgmt., Inc., 164 B.R. 53 (Bankr. W.D. Pa. 1994)