We report the discovery of active star formation in the HI cloud associated with the interacting Seyfert system NGC 3227/NGC 3226 that was originally identified as a candidate tidal dwarf galaxy (TDG) by Mundell et al. and that we name J1023+1952. We present the results of broad-band BRIJHK and ultraviolet imaging that show the HI cloud is associated with massive on-going star formation seen as a cluster of blue knots (M_B < -15.5 mag) surrounded by a diffuse ultraviolet halo and co-spatial with a ridge of high column density neutral hydrogen its southern half. We also detect Ha emission from the knots with a flux density corresponding to a star-formation rate of SFR~0.011 Msun per yr. Although J1023+1952 spatially overlaps the edge of the disk of NGC 3227, it has a mean HI velocity 150 km/s higher than that of NGC 3227 so is kinematically distinct; comparison of ionized and neutral gas kinematics in the star-forming region show closely matched velocities, providing strong evidence that the knots are embedded in J1023+1952 and do not merely lie behind in the disk of NGC 3227, thus confirming J1023+1952 as a gas-rich dwarf galaxy. We discuss two scenarios for the origin of J1023+1952; as a third, pre-existing dwarf galaxy involved in the interaction with NGC 3227 and NGC 3226, or a newly-forming dwarf galaxy condensing out of the tidal debris removed from the gaseous disk of NGC 3227. Given the lack of a detectable old stellar population, a tidal origin is more likely. If J1023+1952 is a bound object forming from returning gaseous tidal tail material, we infer a dynamically young age similar to its star-formation age, and suggests it is in the earliest stages of TDG evolution. Whatever the origin of J1023+1952 we suggest that its star formation is shock-triggered by collapsing tidal debris. (Abridged)
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