The US Trustee has asked the bankruptcy court in Delaware to deny Character.ai's application to hire Houlihan Lokey Capital, Inc. as its investment banker, arguing that the bank would collect at least $2.05 million, or 10.25% of the $20 million Disney has agreed to pay, for a deal it neither found nor negotiated. The 10-page objection, filed on Friday, November 13, 2026, as Docket No. 156 in case 26-11603, says Houlihan was retained on September 23, five days after Character Technologies signed the agreement that fixed the Disney terms and took $7.5 million from Disney in advance. Judge Brendan L. Shannon is scheduled to hear the application at 10 a.m. Eastern on Tuesday, November 17.

In Short

The US government's bankruptcy watchdog has objected to the fee Character.ai's investment bank, Houlihan Lokey, would earn if the company's $20 million sale to Disney closes. Houlihan would receive at least $2.05 million, a little over 10% of the price, although it was hired after the Disney terms were agreed, and money paid to advisers comes out of the pot that would otherwise go to the company's creditors. A judge takes up the request on November 17 and can approve the bank, reject it or approve it on different terms, about two weeks before the hearing on the sale itself.

What the US Trustee filed

The objection comes from Andrew R. Vara, the United States Trustee for Regions 3 and 9, the Justice Department official who oversees bankruptcy cases in Delaware. It is signed by trial attorney Linda J. Casey, the same lawyer who filed the US Trustee's October 27 objection to Character.ai's sale procedures. Its target is the company's application, filed on October 27 as Docket No. 71, to employ Houlihan "as Investment Banker to the Debtor Effective as of Petition Date" under sections 327 and 328(a) of the Bankruptcy Code.

The argument is set out in the first paragraph. Under the engagement agreement, according to the objection, Houlihan "will be entitled to compensation in excess of 10% of the total consideration paid by Disney" if the Disney deal closes, "even though Houlihan was not retained until after the Debtor negotiated the deal with Disney and after the Initial Transaction," the $7.5 million prepayment described below, had closed. If a rival outbids Disney, the fee "will be based upon the overall purchase price, and not the amount that the successful bid exceeds" Disney's offer.

"Houlihan should not receive over 10% of a purchase price where it was wholly uninvolved in attracting the buyer or negotiating the sale price," the objection states.

The filing met a deadline set for the US Trustee alone: noon Eastern on November 13, according to the caption. Other parties had until November 10 to object to the application, according to the court docket.

The fee terms

The engagement agreement sits at Exhibit 1 to Exhibit A of the application. The objection summarizes its payment clauses as follows.

Term Amount or rule Source clause
Date Houlihan was retained September 23, 2026 Objection, paragraph 14
Monthly Fee $100,000 per month during the term Engagement Agreement, paragraph 3(i)
Minimum Monthly Fees Three Monthly Fees, $300,000, even if the agreement ends before three months Engagement Agreement, paragraph 3(i)
Transaction Fee, Aggregate Gross Consideration up to $25 million $1,750,000 Engagement Agreement, paragraph 3(ii)
Transaction Fee, Aggregate Gross Consideration above $25 million $1,750,000 plus 3.0% of the incremental amount Engagement Agreement, paragraph 3(ii)
Disney sale counted as a "Transaction" Yes, according to company counsel Objection, paragraph 17
Minimum pay if Disney closes without an overbid $2,050,000, or 10.25% of total cash consideration Objection, paragraph 17
Retention sought from Petition date, October 12, 2026 Application title

The agreement also contains the company's acknowledgment that the fee is fair whatever the hours. In the words quoted in the objection, "the parties agree that (x) the fee and expense reimbursement arrangement provided for herein is reasonable, fairly compensates Houlihan Lokey, and provides the requisite certainty to the Company and (y) none of the fees hereunder shall be considered to be 'bonuses' or fee enhancements under applicable law." That is paragraph 8 of the engagement agreement.

How the fee would be calculated

According to the objection, the engagement agreement sets Houlihan's compensation in seven steps.

  1. Monthly Fees of $100,000 accrue for each month the agreement runs.
  2. If the agreement is terminated within three months, Houlihan "will nevertheless be paid three monthly fees," or $300,000.
  3. A Transaction Fee becomes payable "upon the closing of a 'Transaction.'" Company counsel "has informed the U.S. Trustee that the transaction with Disney is a 'Transaction' for purposes of the Engagement Agreement."
  4. The Transaction Fee is measured on "Aggregate Gross Consideration," or AGC. Up to $25 million of AGC earns a flat $1,750,000.
  5. Above $25 million, Houlihan adds 3.0% of the incremental AGC.
  6. If the Disney sale closes and the company sells any of its other assets, the extra consideration is added to Disney's $20 million to reach the AGC figure.
  7. If Disney is outbid, "the entire purchase price will be included in the AGC."

The structure means the flat fee covers most outcomes in this case. Under the tiers as described, Disney's $20 million fills most of the first band on its own, so the first $5 million raised from any other asset sale adds nothing to Houlihan's pay, and a rival bid earns the bank more only once it passes $25 million. The objection does not say whether any Monthly Fees are credited against the Transaction Fee; its own $2.05 million figure adds the two together.

What the bank would earn under different outcomes

The table applies the fee terms as the objection describes them, using the three-month minimum for Monthly Fees. The $21.7 million row is the minimum a rival must offer to displace Disney under the court-approved procedures.

Outcome AGC Transaction Fee Minimum Monthly Fees Total Share of AGC
Disney closes at $20 million, no other sale $20.0 million $1.75 million $0.30 million $2.05 million 10.25% (US Trustee figure)
Rival wins at $21.7 million $21.7 million $1.75 million $0.30 million $2.05 million 9.4%
Disney closes, plus $5 million of other assets $25.0 million $1.75 million $0.30 million $2.05 million 8.2%
Rival wins at $30 million $30.0 million $1.90 million $0.30 million $2.20 million 7.3%

All rows other than the first are PPC Land calculations based on the fee terms quoted in the objection. Any months beyond the minimum would add $100,000 each.

The US Trustee's point about overbids is easiest to see in the second row. A rival at $21.7 million would add $1.7 million to the price, and less once Disney's $700,000 break-up fee is paid, by PPC Land's calculation. On the objection's reasoning, that increment is the value Houlihan would have created. The bank's Transaction Fee in that case would be $1.75 million, more than the increment itself.

A deal settled before the bank arrived

The objection reconstructs the sale history from the first-day declaration of Colin M. Adams, Docket No. 18, and the papers attached to the sale motion.

In August 2025 the company engaged an investment bank the filings call only the "Prior Banker." That bank approached "approximately 28 potential parties," and its outreach "resulted in only one proposal that was ultimately deemed to be unworkable," according to the objection, which cites paragraph 12 of the Adams declaration. The company then concentrated on strategic partners and operational changes while still working with the Prior Banker, whose engagement ended in August 2026. PPC Land reported the 28-party figure in October, when the banker's own declaration disclosed one unusable offer from 28 potential buyers.

By September 2026, two parties had expressed interest in a strategic transaction "directly to Debtor's management," according to the objection. The company negotiated with both and chose Disney.

On September 18, 2026, Character Technologies signed the Exclusivity and Prepayment Agreement, or EPA, found at pages 100 to 122 of Docket No. 15-2. The EPA provided that the company would be paid $20 million. Disney paid $7.5 million the same day, made up of a $5.5 million "Up-Front Payment" and a $2 million "Refundable Deposit," which the objection calls the Initial Transaction. Attached to the EPA was a "Binding Term Sheet." The EPA, according to the objection, requires the parties to use reasonable best efforts to sign definitive documents "on terms consisting with, and not deviating from, the terms set forth in the Term Sheet."

The EPA also carried releases that took effect at signing. According to the objection, it "contained irrevocable releases and waivers, effective as of September 18, of claims that the Debtor, its affiliates, each of its and their 'Representatives,' and any successors and assigns may have against Disney, as well as the Debtor's employees being hired by Disney pursuant to the transaction terms." Earlier filings had described the releases only in general terms.

Houlihan was retained as of September 23. By then, on the US Trustee's account, the buyer had been found, the price set, the term sheet made binding and the first $7.5 million paid. Houlihan's own declaration in October acknowledged in a footnote that the bank had no part in the September negotiations with Disney. Disney's wider spending does not change the arithmetic either. The company budgeted about $180 million for the Character.ai staff it hired, money that goes to employees. Only the $20 million reaches the estate, and that is the sum Houlihan's fee is measured against.

The objection rests on two provisions. Section 327(a) of the Bankruptcy Code, quoted in full in the filing, provides: "Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title." Section 328(a) adds that a debtor may, with court approval, employ such a professional "on any reasonable terms and conditions of employment."

The choice of section matters. Terms approved under section 328(a) are fixed in advance, and the court can later depart from them only if they prove improvident in light of developments that could not have been anticipated when they were set. That helps explain why the US Trustee is contesting the terms now, at the retention stage, rather than waiting for Houlihan to apply for payment.

On reasonableness, the US Trustee relies on Third Circuit and Delaware case law. Market practice is the starting point, but the market informs the answer rather than settling it, "especially in the realm of bankruptcy, where courts play a special supervisory role," the objection says, quoting United Artists Theatre Co. (3d Cir. 2003). "Practices common in the marketplace are not automatically reasonable under Section 328," it adds. The filing lists five factors from In re Insilco Technologies (Bankr. D. Del. 2003):

  • whether the terms "reflect normal business terms in the marketplace";
  • whether the debtor and the professional "are sophisticated business entities with equal bargaining power who negotiated at arms' length";
  • whether the terms "are in the best interests of the estate";
  • whether "creditors oppose the retention provisions"; and
  • whether "any retainer is reasonable given the size, circumstances and posture of the case."

The party seeking approval carries the burden of proving the terms reasonable, the objection says, citing In re Hathaway Ranch Partnership (Bankr. C.D. Cal. 1990). The court "may approve some of the terms and conditions proposed in an employment application while rejecting others," according to In re Federal-Mogul Global (3d Cir. 2003). And, citing In re Busy Beaver Building Centers (3d Cir. 1994), the filing says bankruptcy courts "must protect estates from overreaching professionals who would otherwise drain them of wealth that by right should be preserved for the benefit of creditors and owners."

Applied to Houlihan, the conclusion is blunt. "The Debtor's proposed compensation of Houlihan is both unreasonable and improvident, as it allows Houlihan to collect substantial fees even if it produces no demonstrable benefit for the Debtor's estate," the objection states. "Paying Houlihan slightly more than 10% of the $20 million purchase price is not reasonable where Houlihan neither (i) introduced Disney to the Debtor nor (ii) negotiated the deal terms."

What the US Trustee would accept, and what it would not

The objection does not say Houlihan should go unpaid. "It is possible that Houlihan could assist the Debtor with the sale of assets that are not subject to the Disney SHA," it says. "In such a scenario, Houlihan should be entitled to compensation for the benefit to the estate."

The US Trustee's position is that the Disney price should not count toward the fee at all. Taking it out, however, exposes a second problem in the flat first band. Because the engagement letter "entitles Houlihan to $1,750,000 on any sale where the purchase price is up to $25 million," leaving Disney out "could lead to the absurd result of the estate owing Houlihan a $1,750,000 transaction fee for a sale with a purchase price that is less than the transaction fee."

On a contested auction, the filing draws the same line. "Whether Disney or another bidder is the successful bidder, the value provided by Houlihan to the estate would be the increased bid, not the full cash consideration." And on any claim that Houlihan added value to the Disney deal itself, "the Application is devoid of facts supporting that contention."

The relief requested goes further than a fee cut. The US Trustee asks the court to "issue an order denying the Application and granting such other relief as this Court deems just." A footnote adds that the US Trustee "raised additional concerns regarding the proposed order approving the Application," which it believes "have been or will be resolved consensually," and reserves the right to raise them at the hearing if not.

One bank, one name

The objection also puts a single legal name on the company's banker. Filings in the first week of the case were inconsistent. The board resolution attached to the petition named Houlihan Lokey, while the declaration supporting the sale motion, Docket No. 17, was filed by a managing director of "Houlihan Capital, Inc." PPC Land recorded the discrepancy when the company's chief executive's declaration put monthly ad sales at $2.5 million, and the sale notice that ran in USA Today on November 9 listed "Houlihan Lokey" as the contact for bidders.

The retention application settles it. Its title, quoted in full in the objection and on the docket, seeks to employ "Houlihan Lokey Capital, Inc.," and the engagement agreement quoted in the objection refers to the firm as "Houlihan Lokey." The objection defines that entity as "Houlihan" throughout and treats it as the bank retained on September 23.

Four retentions approved, one contested

The objection arrived on a busy day on the docket. Character Technologies filed five retention requests on October 27: Houlihan, its lead counsel Wilson Sonsini Goodrich & Rosati, Young Conaway Stargatt & Taylor as counsel to the board's disinterested committee and conflicts counsel, Arete Partners to supply Colin M. Adams as chief executive, and Stretto as administrative advisor. On November 13, after the company filed certifications of counsel, the court signed orders approving the other four, along with procedures for interim payment of professionals and for ordinary-course professionals, according to the court docket. Houlihan's is the only one of the five still open, and it goes to the November 17 hearing with an objection attached.

Creditors now have their own representation. The US Trustee appointed an official committee of unsecured creditors on November 4, Docket No. 115, according to the objection. The certificate of service lists the committee's counsel as McDermott Will & Schulte LLP. The docket shows the same firm had appeared on October 29 for A.D., a minor acting through a guardian ad litem, and withdrew from that representation on November 4, the day the committee was appointed. The committee served its first requests for documents on the company on November 10, according to the docket. Whether creditors oppose the terms is one of the five Insilco factors the US Trustee cites; through November 13, the docket shows no filing by the committee on the Houlihan application.

The fee fight sits beside the privacy questions that have shaped the case. On October 29, 39 states and the District of Columbia joined the US Trustee's earlier objection and said a consumer privacy ombudsman was necessary if user data were sold. On November 12, the company filed competing proposed orders directing the US Trustee to appoint one under section 332(a), Docket No. 148, according to the docket. The objection to Houlihan does not mention either filing.

Why this matters for the marketing community

Character.ai is an advertising-funded chatbot platform, and its bankruptcy is a test of what happens to an ad-supported consumer app when the money runs out. Advertising brought in about $2.5 million in August 2026, close to half of monthly revenue, while losses ran at about $8 million a month, according to the chief executive's first-day declaration. Houlihan's minimum fee of $2.05 million equals about four-fifths of that August advertising figure, by PPC Land's calculation.

The structure of the Disney deal is what makes the percentage so high. The transaction is close to an acqui-hire: Disney hired most of the company's workforce, including its then chief executive, before the filing and is paying $20 million for a non-exclusive license to its technology, while the app, the brand and the user data stay with the company, as PPC Land reported when Character.ai faced a wind-down as Disney's $20m bid licensed its IP, not the app. With Disney as stalking horse, the rules require a rival to offer at least $21.7 million to take its place, a floor the company kept after 32 states objected. A small headline price leaves little room for adviser fees before creditors feel it.

Those creditors include the litigants, vendors and service providers the estate owes. Fees approved for professionals are typically paid ahead of general unsecured claims, so the size of Houlihan's fee bears directly on what remains for them. The company, operating as debtor in possession, now has its lawyers and its chief executive approved, a committee seeking documents and a sale hearing fixed for December 3 and 4. The question for November 17 is whether the bank brought in after the deal was struck is paid as if it made it.

The remaining calendar is tight. Sale objections are due on November 18, the creditors' meeting is on November 19, bids are due on November 24 and the auction is set for December 1, under the order the court entered on November 4 after indicating it would overrule the states' objections.

What the filing leaves open

The objection does not name the Prior Banker or say what it was paid. It does not quote the application's own case for the fee, set out what work Houlihan has done since September 23, or say whether Monthly Fees are credited against the Transaction Fee. Nor does it identify the additional concerns about the proposed order that the US Trustee expects to resolve, or the committee's position on the application.

Key facts

  • Document: United States Trustee's Objection to the Application of the Debtor for Entry of an Order Pursuant to 11 U.S.C. §§ 327 and 328(a), Bankruptcy Rules 2014 and 5002, and Local Rules 2014-1 and 2016-2 Authorizing Retention and Employment of Houlihan Lokey Capital, Inc. as Investment Banker to the Debtor Effective as of Petition Date
  • Docket number: 156, filed November 13, 2026, 10 pages, "Re: D.I. 71"
  • Case: In re Character Technologies, Inc., Case No. 26-11603 (BLS), Chapter 11, US Bankruptcy Court for the District of Delaware, Judge Brendan L. Shannon
  • Filed by: Andrew R. Vara, United States Trustee for Regions 3 and 9; signed by Linda J. Casey, Trial Attorney, Office of the United States Trustee, Wilmington
  • Application opposed: Docket No. 71, filed October 27, 2026; engagement agreement at Exhibit 1 to Exhibit A
  • Objection deadline: November 13, 2026, noon ET (US Trustee); November 10, 2026 for other parties, according to the docket
  • Hearing: November 17, 2026, 10:00 a.m. ET, US Bankruptcy Court, 824 Market Street, 6th Floor, Courtroom 1, Wilmington
  • Fee terms: $100,000 Monthly Fee, three-month minimum; Transaction Fee $1,750,000 on Aggregate Gross Consideration up to $25 million plus 3.0% above it; minimum $2,050,000 on the Disney deal, 10.25% of $20 million
  • Retention date: September 23, 2026; EPA signed September 18, 2026 (Docket No. 15-2, pages 100 to 122)
  • Other docket references: sale motion, Docket No. 15; Adams declaration, Docket No. 18; bidding procedures order, Docket No. 106; committee appointment, Docket No. 115
  • Relief sought: an order denying the application
  • Served on: Wilson Sonsini Goodrich & Rosati, P.C. (counsel to the debtor) and McDermott Will & Schulte LLP (counsel to the committee)
  • Case website: https://cases.stretto.com/chartech

Timeline

Summary

Who: Andrew R. Vara, the United States Trustee for Regions 3 and 9, through trial attorney Linda J. Casey; Character Technologies, Inc., the company behind Character.ai; Houlihan Lokey Capital, Inc., its proposed investment banker; Disney Worldwide Services, Inc., the stalking horse buyer; and the official committee of unsecured creditors appointed on November 4.

What: An objection, Docket No. 156, asking the court to deny Character.ai's application to hire Houlihan Lokey. Under the engagement agreement, Houlihan would earn $100,000 a month with a three-month minimum and a $1,750,000 Transaction Fee on up to $25 million of consideration, plus 3.0% above that. The US Trustee says the Disney deal alone would pay the bank at least $2.05 million, 10.25% of the $20 million price, although the terms were fixed and $7.5 million paid before Houlihan was retained on September 23.

When: Filed on Friday, November 13, 2026, at the US Trustee's noon deadline. The application, filed on October 27, is set for hearing at 10 a.m. Eastern on Tuesday, November 17, 2026, ahead of the December 3 and 4 sale hearing.

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

Why: The US Trustee argues that a fee measured on the whole purchase price rewards the bank for value it did not create, since it neither introduced Disney nor negotiated the terms, and that any overbid would add only the increment, not the full price. Every dollar of adviser fees comes out of an estate whose main asset sale is worth $20 million, while the advertising-funded app itself, its brand and its user data remain to be sold or wound down.