## Facts

- Keppelon planned construction of a new apartment building and entered a contract with W. M. Ritter Flooring Corporation (Ritter) under which Ritter would furnish and install the building’s flooring.
- Before beginning the flooring work, Ritter refused to start and declined to proceed under the contract.
- Keppelon treated Ritter’s refusal as a repudiation and sued for damages.
- Ritter answered and asserted a defense that, after the contract was signed, Keppelon’s financial condition weakened and Keppelon failed to perform other obligations, making him an unsafe credit risk for a contractor who would have to perform work before receiving payment.
- The trial court struck that defense from the pleadings.
- Ritter then amended its pleading to allege more specifically that Keppelon was insolvent at the time the flooring work was to commence.
- The trial court struck the amended insolvency defense as well.
- The case proceeded to trial without those defenses, and the jury returned a verdict for Keppelon.
- Ritter appealed to the New Jersey Court of Errors and Appeals, challenging the striking of the defenses and the resulting judgment.

## Issues

1. In an executory construction-type contract, may a contractor defend against a repudiation claim by alleging that the owner became insolvent or so financially impaired by the time performance was due that the contractor was justified in refusing to begin work unless payment security or other assurance was provided?
2. Did the trial court err by striking Ritter’s financial-impairment and insolvency defenses at the pleading stage and thereby preventing the jury from hearing them?

## Decision

- The appellate court reversed the judgment for Keppelon and ordered a new trial.
- The court held that Ritter’s allegations of Keppelon’s materially weakened financial condition and, more pointedly, Keppelon’s alleged insolvency at the time performance was to start stated a potentially valid defense.
- Because the defenses, if proven, could excuse or suspend Ritter’s duty to perform (at least until satisfactory assurance of payment), it was error to strike them and keep them from the factfinder.

## Legal Principles

- In a bilateral executory contract, if the party who is to receive performance becomes insolvent (or suffers a serious financial breakdown) by the time the other party’s performance is due, the performing party may be justified in refusing to proceed without reasonable protection against nonpayment.
- A contractor asked to provide labor and materials on credit is not necessarily required to continue as though the owner’s ability to pay is unchanged when insolvency is alleged to exist at the time work is to begin.
- Allegations of insolvency or severe financial impairment can present fact questions bearing on justification for nonperformance; when properly pleaded, they should not be disposed of by striking the defense if the defense could matter to liability.
- When such defenses are wrongly removed from the case and the matter is tried to verdict without them, the proper remedy is reversal and a new trial so the defenses may be litigated on the merits.

## Conclusion

Keppelon sued Ritter for repudiating a flooring contract after Ritter refused to begin work, but Ritter claimed it was justified because Keppelon’s finances had deteriorated and Keppelon was allegedly insolvent when performance was to commence. The New Jersey Court of Errors and Appeals held those allegations could constitute a defense and should not have been stricken from the pleadings; it reversed the judgment for Keppelon and ordered a new trial so a jury could consider the insolvency-based defenses.


Keppelon v. W. M. Ritter Flooring Corp., 116 A. 491 (1922)