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Claim in Recoupment Applicable to Negotiable Instrument

30. What is a “claim in recoupment”?

A claim in recoupment is similar to a personal defense. It allows a payor to offset any claim that she has against the claimant or the original issuee.

•    Note: A claim in recoupment applies against a holder, but not a holder in due course.

•    Example: The payee on an instrument owes a debt to the named payor. If a subsequent holder presents the instrument for payment, the payor may offset that claim against payment to the holder. If, however, the payee is a holder in due course, the payor cannot offset that claim.

•    Discussion: Why do you think a claim in recoupment is enforceable against a holder but not a HDC? Do you agree with this?

•    Practice Question: Evan enters into a contract with Frank. As part of the contract, Evan issues a promissory note to Frank. Frank fails to fully perform some immaterial aspects of the contract. This entitles Evan to offset of the payment price owed to Frank. If Frank presents the note for payment, what is the result? What if he trades the note to Ernest, who qualifies as an HDC?

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