Character Technologies, the bankrupt operator of Character.AI, is pressing ahead with proposed asset-sale procedures built around a $20 million Disney transaction, despite objections from state attorneys general and the U.S. Trustee over bidding terms and protections for users’ personal information.
The dispute was set for an October 30 hearing in the U.S. Bankruptcy Court for the District of Delaware. The company has asked the court to approve auction procedures while retaining a $21.7 million minimum for competing offers and a $700,000 fee payable to Disney if another bidder wins.
A separate filing by attorneys general for 39 states and the District of Columbia backs the U.S. Trustee’s request for a consumer privacy ombudsman if the proposed sale or transfer includes property containing users’ personally identifiable information. Their concerns extend to information belonging to minors who have used the chatbot platform.
The coalition also questions how clearly the company has described the scope of the potential transaction. The states contend that the sale motion does not adequately make clear that Character Technologies is seeking to sell its entire platform in addition to the technology license Disney has agreed to purchase. That distinction matters because a broader platform transfer could raise questions about the treatment of users’ account information and conversations.
Disney Worldwide Services is the proposed stalking-horse purchaser for a defined group of assets. In bankruptcy auctions, a stalking-horse bidder establishes an initial offer against which other prospective buyers compete. Such arrangements can include protections compensating the opening bidder if it is ultimately outbid, but those protections can draw objections when creditors or other interested parties believe they discourage competing offers.
Character Technologies defended the proposed terms in an October 27 reply. The company argued that Disney’s contribution goes beyond the purchase price, saying Disney would supply personnel and services that it values at more than $5 million. It declined to lower either the competing-bid threshold or the proposed payment to Disney.
The company did make some changes in response to objections, including clarifying that approval of the auction procedures would not constitute approval of the entire Disney agreement. It also indicated a willingness to accept a consumer privacy ombudsman in appropriate circumstances, without giving the unconditional commitment sought by the states for transfers involving personal information.
A consumer privacy ombudsman provides an independent assessment to help a bankruptcy court evaluate a proposed transfer of consumer information. The role can include examining whether a transaction is consistent with privacy commitments made to users. Appointment of an ombudsman is distinct from a final decision authorizing a sale.
The latest coalition filing adopts the U.S. Trustee’s October 27 objection, escalating an issue the states had previously reserved the right to raise. The immediate dispute concerns the rules governing the sale process and the need for independent privacy scrutiny, rather than simply which buyer offers the highest price.