A Bankruptcy Court Can't Force You To Provide Service To A Third Party - Or Can It?

One of the fundamental principles of commercial law is the freedom to contract with a particular party, or to refuse do so. "As a general rule, businesses are free to choose the parties with whom they will deal, as well as the prices, terms and conditions of that dealing." See Pac. Bell Tel. Co. v. Linkline Commc'ns, Inc., 555 U.S. 438 (2009). However, the Bankruptcy Code may permit a court to alter this fundamental principle in certain circumstances. A bankruptcy court did just that in In re Mathson Industries, Inc., 423 B.R. 643 (E.D. Mich. 2010).

In that case, Negri Rossi (Seller) sold a number of injection molding machines valued in excess of $3 million for which it was not paid prior to debtor's bankruptcy. The Seller also failed to perfect its security interest in the machines, making it an unsecured creditor. The machines were the most valuable asset in the bankruptcy estate. The case was converted to a Chapter 7 liquidation and the trustee (Trustee) held an auction to sell the machines. During the course of the auction, the Seller advised the bidders that it would not service the machines post-sale. Because of the proprietary nature of the machines, apparently no third party could do so. Draexlmaier (Bidder), who indicated a desire to make a bid to purchase the machines for $2 million, said it was unable to make a bid on that basis. The Seller sent a letter to the Trustee indicating that without its willingness to service the machines, they would likely have to be sold for scrap value. In the alternative, the Seller said it would make an offer to buy them for $100,000 and waive its unsecured claim against the estate, which it estimated was worth $900,000.

The Bidder said it would proceed with its bid if the Trustee was able to compel the Seller to service the machines by agreement or court order. The Trustee then filed an adversary proceeding seeking an order requiring the Seller to service the machines for the successful bidder, claiming that the Seller's refusal to do so was a violation of the automatic stay imposed by section 362(a)(6) of the Bankruptcy Code. This section precludes a creditor from taking "any act[tion] to collect...or recover a claim against the debtor that arose before commencement of the case...". The Trustee argued that the Seller's actions were an attempt to recover its claim by buying the machines at a discounted price and then reselling them at full value, thereby depriving the estate of the machines'...