Can assets be protected from sale in bankruptcy by a contract not to sell them?

Question

It is common to not be allowed to resell seeds obtained from growing genetically modified plants, as a condition of having the original seeds sold to you. But one might have several thousand dollars worth of such seeds as a business asset, which, if not for the prohibition on resale, could be sold to satisfy creditors.

Do contractual agreements not to sell things survive bankruptcy and prevent those things from being sold off to pay creditors? Or would the things be seized away from the legal person who is bound by the contract, and only then sold off, free of the contractual encumbrance, by a different entity?

(It might be that in this particular example, it is really the lack of a patent license, rather than the presence of a contract term, that prevents the sale. Please ignore that. I am interested in whether contractual terms can prevent asset sales.)

Answer 1

A bankruptcy court has the authority to authorize a sale contrary to a contractual obligation, but can only set aside a property right when substantially equivalent security is provided to the person with the property right.

Usually, the property right is a mortgage or lien. But it could be an equitable ownership interest in trust. It could also be a third party's copyright or patent right.

It isn't clear whether a prohibition on resale is a contract right or property right. Also, even if there is a contract right, even outside of bankruptcy, many such restrictions are void as a matter of law as a restrain on alienation which is void as contrary to public policy. In some circumstances, likewise, the the "first sale doctrine" prohibits contractual limitations on resale as a matter of public policy.

Normally, the restriction would be on using the genetic material created by the plant grown from the seeds to grow new seeds, and not a restriction on reselling unplanted seeds subject to the restriction, which might very well be contrary to public policy, in general, or a contractual obligation that the bankruptcy court could invalidate.