KRS 355.3-305: Defenses and claims in recoupment.

(1) Except as stated in subsection (2) of this section, the right to enforce the obligation

of a party to pay an instrument is subject to the following:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;

2. Duress, lack of legal capacity, or illegality of the transaction which,

under other law, nullifies the obligation of the obligor;

3. Fraud that induced the obligor to sign the instrument with neither

knowledge nor reasonable opportunity to lea rn of its character or its

essential terms; or

4. Discharge of the obligor in insolvency proceedings;

(b) A defense of the obligor stated in another section of this article or a defense of

the obligor that would be available if the person entitled to enfor ce the

instrument were enforcing a right to payment under a simple contract; and

(c) A claim in recoupment of the obligor against the original payee of the

instrument if the claim arose from the transaction that gave rise to the

instrument; but the claim of the obligor may be asserted against a transferee of

the instrument only to reduce the amount owing on the instrument at the time

the action is brought.

(2) The right of a holder in due course to enforce the obligation of a party to pay the

instrument is subject to defenses of the obligor stated in subsection (1)(a) of this

section, but is not subject to defenses of the obligor stated in subsection (1)(b) of

this section or claims in recoupment stated in subsection (1)(c) of this section

against a person other than the holder.

(3) Except as stated in subsection (4) of this section, in an action to enforce the

obligation of a party to pay the instrument, the obligor may not assert against the

person entitled to enforce the instrument a defense, claim in recoupment, or claim to

the instrument (KRS 355.3 -306) of another person, but the other person's claim to

the instrument may be asserted by the obligor if the other person is joined in the

action and personally asserts the claim against the person entitled to enforce the

instrument. An obligor is not obliged to pay the instrument if the person seeking

enforcement of the instrument does not have rights of a holder in due course and the

obligor proves that the instrument is a lost or stolen instrument.

(4) In an action to enforce the obligation of an accommodation party to pay an

instrument, the accommodation party may assert against the person entitled to

enforce the instrument any defense or claim in recoupment under subsection (1) of

this section that the accom modated party could assert against the person entitled to

enforce the instrument, except the defenses of discharge in insolvency proceedings,

infancy, and lack of legal capacity.