Recently I met someone who told me there are those that specifically only use a non serrated Challa knife at the Shabbos meal. I was wondering if there is a source that discusses this and what is the reason?
See here in Taame Haminhagim in the notes
ובספר לבושי מכלול קו"א כתב בשם ספר א' דסכין חד סגולה לפרנסה דאינו עושה פרורין דקשה לעניות. והנה סופי תיבות של "פותח את ידיך" הוא השם הממונה על הפרנסה, ועל כן טוב לחתוך בסכין חד וחלק:
The reason is to avoid crumbs, that is a segula for parnasa, because Chatach is sofe tevot poteach et yadecha, and the shem chatach is linked to parnasa. And if we cut the bread with a great amount of crumbs, as serrated knife this is bad for parnasa
Serrated knives are able to cut soft bread without crushing it; one was exhibited at the World's Columbian Exposition in 1893 in Chicago by the Friedrich Dick company (Esslingen, Germany). One design was patented in the United States by Joseph E. Burns of Syracuse, New York. His knife had sections of grooves or serrations, inclined with respect to the axis of the blade, that form individual small cutting edges which were perpendicular to the blade and thus cut without the excessive normal pressure required of a scalloped blade and without the horizontal force required by positive-raked teeth that would dig into the bread like a wood saw. There were also sections of grooves with the opposite direction of inclination, separated by a section of smooth blade, and the knife thus cut cleanly in both directions in both hard and soft bread.
If so, perhaps the serrated knives that preceded that time were much more like saws, and would not do a good job cutting bread.
The Rama O.C. 250:1 writes:
הגה ויש להשחיז הסכין בערב שבת כי זהו מכבוד השבת שמכין עצמו לאכילה (כל בו וב"י בשם ספר חיי עולם):
RAMA: Additionally one should sharpen his knife on Erev Shabbat, for this honors the Shabbat and prepares him for eating. (Kol Bo; Beis Yosef in the name of Sefer Chayei Olam)
Constantly sharpening a knife will ruin the serrating.
BTW, I once ate by relatives in Meah Shearim, and it was clear that they sharpen their challah knife at home.