Also known as: claim in recoupment · recoupment claims · recoupment
Written by attorneys · grounded in primary & secondary sources — see below
A claim that an obligor may assert against an assignee to reduce the amount owed on an assigned contract. The claim must arise from the transaction that gave rise to the contract between the obligor and the assignor.
Christopher Collins purchased machinery from Compass Logistics under a contract that included a warranty of fitness. Compass Logistics assigned its right to payment to Cardinal Insurance. When the machinery proved defective, Christopher Collins withheld part of the payment. Cardinal Insurance sued for the full amount. Christopher Collins may reduce the sum owed by asserting his warranty claim arising from the original sale.
Cypress Technologies held accounts receivable assigned to a secured lender. After Cypress Technologies entered bankruptcy, the trustee objected when an account debtor attempted to reduce its obligation by a claim arising from the same supply contract. The court permitted the reduction because the claim qualified as recoupment tied directly to the assigned transaction.
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A claim in recoupment must arise from the same transaction that produced the assigned contract. An ordinary setoff may arise from a separate transaction. Under UCC § 9-404(a)(1), only transaction-based claims reduce the assignee's recovery.
Supporting sources
No. The claim may be asserted only to reduce the amount the account debtor owes. It does not permit an affirmative recovery against the assignee beyond that reduction.
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No. Claims in recoupment arising from the original transaction remain available regardless of when notice is received. Only other defenses or claims that accrue after notice are subject to the cutoff rule in UCC § 9-404(a)(2).
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The secured party remains subject to the account debtor's valid claims in recoupment. Collection efforts must honor those offsets to satisfy the commercial reasonableness requirement.