Attorneys general for 39 states and the District of Columbia filed a notice of interest on 14 October in Character Technologies’ Chapter 11 case before Judge Brendan L. Shannon in the US Bankruptcy Court for the District of Delaware, PPC Land reported. The 28-page notice, Docket No. 33 in case 26-11603, sets out conditions the coalition wants any buyer of Character.AI’s business or assets to meet. The states reserved the right to object to the sale, the bidding procedures or a bankruptcy plan, and to request a consumer privacy ombudsman.
Key points
- The coalition cites 2.1 million US accounts registered as belonging to users under 18.
- Its proposed buyer conditions cover age checks, impersonation of licensed professionals, use of chats to train models and advertising choices.
- Character Technologies’ proposed calendar puts the bid deadline on 20 November and a sale hearing on 24 November.
The states’ conditions for Character.AI buyers
The notice names nine conditions. The states want buyers to check users’ ages effectively, take down bots masquerading as therapists, doctors or other licensed practitioners, use conversations to train models only as far as users have permitted, and let people opt out of advertising across devices through their accounts. For a purchaser seeking to operate the service, those demands would affect both the chatbots users encounter and the ways their conversations can be used.
The coalition cited 2.1 million US accounts declared as under-18 on the platform. Its concern extends to the transfer of private conversations in a bankruptcy sale. New York Attorney General Letitia James said those conversations could be sold to the highest bidder, The Verge reported. The states are also urging the judge to require safeguards for sensitive information, including restrictions on minors’ interactions with chatbots, crisis safeguards and a way for users to delete their data.
Several states began investigating Character.AI’s consumer protection and privacy practices in 2024, after a lawsuit brought by the mother of a 14-year-old who died by suicide allegedly after speaking with a chatbot. James’s office said investigators found bots impersonating licensed practitioners, users encountering sexual and violent material, inadequate checks of users’ ages, safety assurances it called misleading and practices that might breach state privacy rules. The states were working with Character.AI on those issues but had reached no agreement before the bankruptcy filing, The Verge reported.
Disney’s $20 million opening bid
Character Technologies filed for Chapter 11 on 12 October and listed estimated assets and liabilities of between $50 million and $100 million, Law Commentary reported. AI Affairs reported the filing and Disney’s $20 million bid. The case puts decisions about a sale before the bankruptcy court while the attorneys general pursue consumer protection and privacy concerns through their own offices.
Disney Worldwide Services is the stalking-horse bidder. Its $20 million offer is for a perpetual, non-exclusive licence to specified Character.AI intellectual property and certain rights associated with company claims. The offer does not give Disney ownership of the platform. Character.AI is also looking for offers covering nearly all or all of its assets, including a bid that might keep the chatbot service running.
The sale process falls under Section 363 of the Bankruptcy Code. The court can approve a higher or otherwise better offer than Disney’s. Character.AI says the service remains available during the case and that users can still access their accounts and data. Character.AI says it wants the platform to continue under a buyer and would shut the service down if the auction yields no workable offer to keep it operating.
The November timetable before Judge Shannon
The coalition’s filing covers 39 states and the District of Columbia, rather than every state attorney general. Texas was among the non-participants, although in December 2024 its attorney general began inquiries into Character.AI using the SCOPE Act and the Texas Data Privacy and Security Act, PPC Land reported. Florida, where the first wrongful-death lawsuit was filed, is also among the 11 states outside the coalition. Their absence does not alter the objections that the participating states have reserved in the bankruptcy case.
The proposed timetable leaves the attorneys general to assess the sale alongside their existing investigations. Character Technologies proposes a bid deadline of 20 November, an auction on 23 November and a sale hearing on 24 November. Disney’s outside date under the proposed calendar is 17 December.
