Attorneys general for 39 states and the District of Columbia today told the US Bankruptcy Court for the District of Delaware that a consumer privacy ombudsman is necessary if Character Technologies, the bankrupt operator of Character.ai, sells or transfers anything that may hold the personal information of its users, minors among them. The coalition's joinder, Docket No. 80, adopts in full the objection the US Trustee filed on October 27 against the company's Disney-led sale procedures. It also makes a point the states had not put on the record before: that the company's sale motion does not make it "readily apparent" that, beyond the license Disney has agreed to buy, the company is seeking to sell its entire platform.

In Short

Character.ai is bankrupt, and a judge is about to decide the rules for selling what it owns, starting with a $20 million deal under which Disney licenses some of its technology. Thirty-nine states and DC now say the company may also be selling the whole app, including the personal information of millions of users, some of them children, and that its paperwork did not make this clear. They back the US Trustee, the Justice Department office that oversees bankruptcy cases, in asking for a consumer privacy ombudsman, an independent person who tells the court whether selling user data would break the privacy promises made to those users. The judge hears the dispute over the sale rules on October 30, 2026.

The filing

The joinder sits in case 26-11603 (BLS), In re Character Technologies, Inc., and was served on all parties requesting notice through the court's electronic filing system on October 29, 2026, according to its certificate of service. It ties together three earlier documents. The target is the company's motion of October 13 (Docket No. 15), which asks the court to approve bidding procedures and bid protections and to designate Disney Worldwide Services, Inc. as stalking horse purchaser for what the filings call the Disney Target Assets. The vehicle is the US Trustee's objection to that motion (Docket No. 69). The grounds come from the coalition's own notice of interest of October 14 (Docket No. 33), which the joinder "fully" incorporates by reference.

The argument itself is two paragraphs long. The rest is the caption, a reservation of rights and the signatures.

Abigail Rushing Ryan, bankruptcy counsel at the National Association of Attorneys General in Washington, signs for the group listed as "NAAG Client States." Five states also sign through their own lawyers, the same five who signed separately on the coalition's October 23 objection: Colorado (Robert Padjen, senior assistant attorney general), Massachusetts (Meena Seralathan, senior trial counsel in the Privacy and Responsible Technology Division), New Jersey (Thomas Huynh, section chief and deputy attorney general), Oregon (Justin D. Leonard, senior assistant attorney general) and Pennsylvania (Melissa L. Van Eck, chief deputy attorney general in the Financial Enforcement Section). The opening paragraph names a different Massachusetts lawyer, Assistant Attorney General Jared Rinehimer, and lists New Jersey through its attorney general, Jennifer Davenport, and Christopher L. Peterson, acting director of the state's Division of Consumer Affairs. The document is not free of slips: its heading spells the word "Coaliton," and the signature block gives the Tennessee attorney general's first name as "Jonthan."

The list of jurisdictions matches the October 14 notice exactly: 39 states and DC. Alabama, Arizona, Florida, Iowa, Maryland, Missouri, Montana, Nebraska, New Mexico, Texas and Wyoming are absent. Florida later joined the notice of interest on its own (Docket No. 58), according to the company, but it is not on this joinder.

From a reserved right to a demand

The coalition has been circling this point for two weeks. When it filed the notice, PPC Land reported that Character.ai faced 40 attorneys general over who could buy its users' chats; the notice listed nine conditions for any buyer and reserved the right to seek a consumer privacy ombudsman under sections 332 and 363(b)(1) of the Bankruptcy Code. The October 23 objection, covered when 32 states said Character.ai's sale rules block bids that would beat Disney, again only reserved the question, pointing to the access Disney personnel have to user data under the transition services agreement.

Today's filing drops the reservation. "To the extent the Debtor is seeking to sell or transfer any property that may contain personally identifiable information or sensitive information of its approximate 12 million active users or past users (including minors), the Coalition of States agree with the United States Trustee - a Consumer Privacy Ombudsman is necessary," the joinder says.

The states give their standing in one sentence. According to the filing, which refers back to the notice of interest for detail, "the States have investigations of the Debtor for consumer protection and privacy violations based upon this platform."

What an ombudsman would do

The mechanism is narrow, and it turns on a single document: the privacy policy in force when the company filed. Under section 363(b)(1), if that policy bars the transfer of personally identifiable information to unaffiliated parties, a sale of such information can go ahead only if it is consistent with the policy, or if the court first appoints an ombudsman under section 332 and then finds, after considering the facts, that no showing was made that the sale would break applicable non-bankruptcy law. Section 332 then has the court order the US Trustee to appoint a disinterested person no later than seven days before the sale hearing. That person can appear at the hearing and inform the court about the privacy policy, the privacy losses or gains for consumers if the sale goes through, the costs or benefits to them, and alternatives that would reduce any losses.

The Code defines personally identifiable information narrowly: a name, home address, email address, telephone number, Social Security number or credit card number given by an individual to obtain a consumer product or service, and, when linked to those, a birth date or other information that would allow the person to be identified or contacted. The joinder pairs that statutory term with a wider one, "sensitive information," without defining it. For a companion chatbot, the distinction is not academic. Whether chat histories fall inside the statutory definition, or only the account details linked to them, the joinder does not address. The October 14 notice argued that years of chats probably hold minors' sensitive information that would be hard to separate from the rest.

Where the company stands

Character's position, set out in its October 27 omnibus reply, has two layers. The company maintains that its privacy policy, as in force on the petition date, permits the sale and transfer of user data in this case, so no ombudsman is required. It also said it was willing to consent to one under appropriate circumstances, given that its liquidity cannot support a substantially extended process, and that it was in talks with the US Trustee and hoped to settle the issue before the hearing. That filing was covered when Character.ai kept its $21.7m bid floor for Disney rivals despite 32 states. Disney, according to the same reply, says it has no access to the company's user data, is not buying personally identifiable information, and should not have its agreement reviewed by an ombudsman.

The joinder mentions none of this. It does not say whether the talks between the company and the US Trustee produced anything, and it does not single out Disney's license, which by its terms excludes user data. Its condition is broader: any sale or transfer of property that "may contain" users' personal or sensitive information.

"Its entire platform"

The second claim is a single sentence. "From the Debtor's Motion, it is not readily apparent that, in addition to the Disney license, the Debtor is seeking to sell its entire platform," the states write.

The structure of the case explains why that matters. Disney is the opening bidder only for the Disney Target Assets: a non-exclusive license to code and patents, plus certain claims, for $20 million. As PPC Land reported when Disney paid $20m for Character.ai's IP and $180m for its staff, the license excludes the app, the brand, user data and chats. The motion also asks for authority to designate "Additional Stalking Horse Purchasers for the Assets," in the words of its title, which the joinder reproduces. When the company filed for bankruptcy, it said that if the sale process did not produce a purchase that keeps the platform running, the platform would be wound down, as covered when Character.ai faced a wind-down as Disney's $20m bid licensed IP, not the app.

The company's October 27 reply was more explicit than the motion. It said Character is marketing any and all of its assets, together or separately, and that its timeline allows for a supported wind-down if a full platform sale is not possible. The states' October 23 objection had already flagged a related inconsistency: the company's declarations described a sale of all or substantially all of its assets, while Disney's term sheet requires the sale order to find that Disney's deal is not such a sale.

Read together, the states' point is about disclosure. A platform sale would carry the accounts, the chat histories and the data that the Bankruptcy Code treats separately. A motion built around a license that excludes all of that, in the states' reading, did not make plain that the rest was also on offer. The joinder does not say what the states consider part of the "entire platform," and it seeks no relief of its own on the point beyond the US Trustee's objection it adopts.

Twelve million users, or 163 million

The joinder's figure deserves a closer look. It refers to the company's "approximate 12 million active users or past users (including minors)." Twelve million is the number of monthly active users in the chief executive's first-day declaration, reported when Character.ai lost $8m a month despite $2.5m in monthly ad sales. It is not a count of past users.

The company's own count of those is far larger. In its first-day motions, it put its current and past platform users at approximately 163 million, as PPC Land reported when Character.ai said its 163 million users are not bankruptcy creditors. By PPC Land's calculation, that is about 13.6 times the figure in the joinder. The October 14 notice cited a third set of numbers from the Kentucky complaint: more than 21.6 million US accounts created by March 13, 2025, more than 2.1 million of them with a declared age under 18.

The gap matters because the data an ombudsman would examine belongs to past users as much as current ones. The joinder's wording, which applies the active-user number to both groups, understates the population whose information is in the estate by the company's own count.

What the coalition has now signed

With this filing, the same 40 jurisdictions stand behind three separate documents. The October 14 notice set conditions for buyers. The October 23 objection, signed first by 31 states and DC and then by eight more on October 28, attacked the bid floor, the $700,000 break-up fee and the releases in Disney's deal; that joinder was reported when Disney kept Character.ai's ex-CEO and staff even if outbid, 8 states said. Today's joinder puts the coalition behind the Justice Department's own bankruptcy watchdog.

The coalition "fully joins, adopts, and incorporates herein by reference" the US Trustee's objection, the filing says. The joinder does not restate that objection's arguments; the ombudsman is the only one it names. The US Trustee filed on October 27, under a deadline the company had extended to 5 p.m. Eastern, an hour after its own reply was due.

The reservation of rights is standard but wide. The states reserve the right "to be heard with respect to the Debtor's Motion and objections thereto; raise additional arguments during any hearing addressing the Debtor's Motion and objections; and to amend, modify, or supplement this Joinder."

The calendar

The bidding procedures hearing is set for October 30 at 10 a.m. Eastern. Under the proposed schedule, bids are due November 20, the auction would follow on November 23 and the sale hearing on November 24. If an ombudsman is needed for that hearing, section 332's seven-day rule would put the appointment no later than November 17, by PPC Land's count. That leaves little slack for a company that says it is burning $8 million to $9 million a month and has warned that it cannot fund a much longer process.

Why this matters for the marketing industry

Character.ai is an advertising-funded consumer AI product. Its advertising revenue reached about $2.5 million in August 2026, close to half of its monthly revenue, according to the chief executive's declaration. A buyer of the platform would acquire not just the inventory but the audience data behind it, and the states have now said, with the US Trustee, that an independent review must come first.

That review would test something every buyer of a data-rich consumer business has to price: whether the privacy promises made to users survive a change of owner. The October 14 notice asked any buyer to honor advertising opt-outs at the account level, including those already exercised, and not to use chats for training or advertising beyond what users consented to. In its October 27 reply, the company said it offers sale-of-data and targeted advertising opt-outs at account level in states where the law requires them, and that it does not share chat content for advertising. An ombudsman's report would put those answers against the privacy policy itself.

There is a recent template. In August 2026, Google won bankrupt Spirit Airlines' data for $10 million, in a sale that carved out customer profiles and required personal data to be removed before delivery. Character.ai's estate holds a more intimate kind of record: conversations with AI characters, including, by the states' account, many from minors, on a platform that the same states are investigating.

Disney has structured its deal to stay outside that question, licensing code and patents and leaving the users behind. The rest of the estate has no such shield. Whoever bids for the app or its accounts will be bidding with 40 attorneys general and the US Trustee on record that the data needs an independent check first.

Timeline

Summary

Who: A coalition of 39 state attorneys general and the District of Columbia, represented by Abigail Rushing Ryan of the National Association of Attorneys General and by separate counsel for Colorado, Massachusetts, New Jersey, Oregon and Pennsylvania, joining the Office of the United States Trustee against Character Technologies, Inc., operator of Character.ai, in a sale process with Disney Worldwide Services, Inc. as stalking horse purchaser.

What: A joinder (Docket No. 80) that fully adopts the US Trustee's objection to the company's bidding procedures motion and states that a consumer privacy ombudsman is necessary if the company sells or transfers any property that may contain personally identifiable or sensitive information of its users, including minors. The states also say the motion does not make apparent that, beyond the Disney license, the company is seeking to sell its entire platform. The joinder cites "approximate 12 million active users or past users," while the company's own count of current and past users is about 163 million.

When: Filed and served today, October 29, 2026, the day before the October 30, 2026 hearing on the bidding procedures and two days after the US Trustee's objection and the company's reply.

Where: The US Bankruptcy Court for the District of Delaware, case 26-11603 (BLS).

Why: The states say they are investigating the company for consumer protection and privacy violations tied to the platform. Disney's license excludes user data, but the app, the brand and the accounts remain for sale, and an ombudsman would examine whether transferring users' information to a buyer is consistent with the privacy policy in force when the company filed. For advertisers and buyers of consumer data, the outcome shapes what any purchaser of the platform could do with the audience it acquires.