Eight state attorneys general on October 28, 2026, joined the coalition objecting to the rules under which Character Technologies, the bankrupt operator of Character.ai, plans to auction a license to its technology with Disney as the opening bidder. The four-page joinder, filed in the US Bankruptcy Court for the District of Delaware two days before the hearing on those rules, puts Alaska, Georgia, Illinois, Indiana, South Dakota, Utah, Virginia and West Virginia behind the October 23 objection and offers a blunter reading of the deal than the coalition did: Disney's $20 million bid, the states write, is "nothing more than a veiled attempt to buy releases."

In Short

Character.ai is bankrupt and wants a judge to approve the rules for auctioning a license to its technology, with Disney's $20 million offer as the bid to beat. Eight more states have now signed on to an objection saying those rules are built for Disney, because Disney keeps the staff it hired, a $700,000 fee and legal protections even if someone else wins. With them, all 39 states and DC that first raised concerns in October now formally oppose the rules, and the judge hears the dispute on October 30, 2026.

The filing

The document is Docket No. 79 in case 26-11603 (BLS), In re Character Technologies, Inc. Its caption refers to two earlier filings: the company's motion to approve bidding procedures and designate Disney Worldwide Services, Inc. as stalking horse purchaser (Docket No. 15), and the coalition's objection to that motion (Docket No. 66).

Abigail Rushing Ryan, bankruptcy counsel at the National Association of Attorneys General in Washington, signed for the group, which the signature block calls "NAAG Client States." Two of the eight name their attorneys general in the caption. Illinois appears as the People of the State of Illinois by Attorney General Kwame Raoul, and Virginia as the Commonwealth of Virginia, ex rel. Jay Jones, Attorney General. The others appear by state or office: the State of Alaska, the State of Georgia, the State of Indiana, the Attorney General for the State of South Dakota, the State of Utah through the Office of the Utah Attorney General, and the Office of the West Virginia Attorney General. According to the certificate of service, the joinder went to all parties requesting notice through the court's electronic filing system on October 28.

The states adopt the coalition's objection in full and incorporate it by reference. What they add is short: a statement of joinder, a chart and a reservation of rights. "The States ask that this Court sustain the Coalition's Objection and deny approval of the bidding procedures as written," the filing says.

It arrives late in the calendar. The general objection deadline was 4 p.m. Eastern on October 23, the day 31 states and the District of Columbia filed their 27-page objection, which PPC Land covered when 32 states said Character.ai's sale rules block bids that would beat Disney. Character answered the objections on October 27. The joinder followed a day later, ahead of a hearing set for October 30 at 10 a.m. Eastern. It does not discuss its own timing, and it does not mention the company's reply.

A coalition back at full strength

On October 14, 39 states and the District of Columbia filed a notice of interest in the case, setting nine conditions for any buyer of Character.ai's assets. PPC Land reported at the time that Character.ai faced 40 attorneys general over who can buy its users' chats. Nine days later, only 31 of those states and DC signed the formal objection. The eight states missing from it are exactly the eight on this joinder.

With the joinder, every state that signed the October 14 notice now stands behind the objection: 39 states and DC, 40 jurisdictions in all. The 11 states absent from the notice, Texas among them, do not appear on either the objection or the joinder. Florida later joined the notice separately, according to the company's October 27 reply, but it is not on this filing either. Why the eight did not sign on October 23 is not explained.

Illinois carries a small footnote of its own. When the company's claims agent listed its service addresses, PPC Land found that Character.ai's bankruptcy notices still named 8 attorneys general out of office, with the Illinois email entry pointing to lisamadigan.org, a domain tied to an attorney general who left office in January 2019. The Illinois joinder is filed in the name of the current officeholder, Kwame Raoul.

Four items, one beneficiary

The argument fits in one paragraph. "The proposed bidding procedures depart from a normal sale process open to higher bids," the joinder says. "The stalking-horse bid is nothing more than a veiled attempt to buy releases for, among other things, possible fraudulent transfer actions." Broken into parts, the states continue, the bid "only benefits Disney and no other possible bidders" because it includes "1. a non-exclusive license, 2. The bankruptcy estate's release of Disney, 3. Disney's purchase of estate claims against the employees it hired, and 4. free and clear and good faith findings."

That tone differs from the coalition's own. The October 23 objection was careful to say the states were not asking the court to unwind the company's prepetition decisions, only to refrain from endorsing them through a bidding procedures order. The joinder adopts that objection in full, yet describes the same bid as a vehicle for buying releases.

The core of the filing is a chart with three columns, headed "Disney Bid," "Rivals Cannot Compete" and "Valuable? To Whom?" Its rows cite the stalking horse agreement, the sale motion and the Bankruptcy Code:

Element of Disney's bid Where the chart locates it What rivals face, per the states States' verdict
Non-exclusive IP license Stalking horse agreement section 3.1 The company can license the same IP to anyone; Google already holds a 2024 non-exclusive license Not scarce
Estate releases of Disney Stalking horse agreement section 12.1 Cover Disney and its hires, including the CEO, for hiring, know-how and use of the licensed IP Valuable only to Disney
Purchased employee claims Stalking horse agreement section 5.2 Estate claims against Disney's hires, which the company says have no value Valuable only to Disney
Court protections Bankruptcy Code sections 363(f), 363(m) and 365(n) Free-and-clear and good-faith findings that, in the chart's words, "Shield license and releases" Valuable only to Disney

Below the table, a separate band reads: "If a rival bidder wins, Disney still keeps:" It lists three things - the workforce, "incl. CEO," citing the chief executive's first-day declaration; a release from the winning bidder, citing section 8.1 of the form transition services agreement; and the "$700K break-up fee," which the chart marks as "Owed if Disney is outbid," citing paragraph 8 of the proposed order.

The license Google already holds

The first row carries the joinder's one new fact. "The Debtor retains the right to sell non-exclusive licenses to any party interested in a license, so this asset is not scarce," the states write. The chart's verdict box says the license is "Available to anyone. The Debtor may give nonexclusive licenses to others without the need of an auction." In parentheses beside it: "Google already holds a 2024 nonexclusive license."

The joinder says nothing more about that license. In August 2024, Character.ai signed a licensing agreement with Google under which its founders returned to Google, a deal PPC Land described in December 2024 as a $2.7 billion investment from Google when it covered lawsuits over Character.ai conversations with minors. The structure, known as an acqui-hire, has now run twice at the same company: Google took the founders and a license in 2024, and Disney is taking most of the remaining staff and a license in 2026.

The states' point is narrower than the history. If the company can grant the same non-exclusive license to anyone, without an auction, then the license is not what makes Disney's package worth $20 million. In their reading, the rest of the package is worth something only to Disney.

Releases, claims and court findings

The second row concerns the releases Character granted Disney and the employees it hired, covering claims up to September 18, 2026, the day the exclusivity and prepayment agreement was signed. The coalition's objection raised the possibility that those releases could be undone as constructive fraudulent transfers under sections 544, 548 and 550 of the Bankruptcy Code. Section 548 lets an estate recover value a company gave away in the two years before filing if it received less than reasonably equivalent value while insolvent, or if the transfer left it insolvent or undercapitalized. The company reports $57 million in cash and no funded debt, and the coalition itself acknowledged that insolvency may be disputed. The joinder does not add to that analysis; it simply calls the possible claims what Disney's bid is designed to buy.

The third row deals with the estate's unreleased claims against the employees who moved to Disney, including the former chief executive. The company assigns them no value. The coalition argued that a buyer acquiring claims against its own new staff is not buying an asset it intends to use. In its October 27 reply, the company said parties are free to bid on any of its assets, together or separately.

The fourth row lists three provisions of the Bankruptcy Code. Section 363(f) allows a sale free and clear of other parties' interests in the property. Section 363(m) protects a good-faith buyer: once a sale closes without a stay, reversing the approval on appeal does not undo it. Section 365(n) lets a licensee keep its rights to licensed intellectual property if the debtor later rejects the license. Together, the chart says, these findings shield the license and the releases. The coalition's objection had made the same point through case law, arguing that a challenge to releases forming part of a section 363 sale may become moot once the sale closes.

What Disney keeps if it loses

The workforce is the most visible part of the deal. Sixty-six of about 86 full-time staff accepted Disney's offers, as PPC Land reported when Character.ai lost 66 of its 86 staff to Disney ahead of the bankruptcy sale. Among them is the former chief executive, Karandeep Anand, who became Disney's chief technology officer, according to PPC Land's report that Disney pays $20m for Character.ai's IP and $180m for its staff.

The company's account is less absolute than the chart's. According to its October 27 reply, Disney agreed to provide transition services to one winning bidder and to let that bidder offer jobs to 80% of the former employees now at Disney. The joinder does not mention that provision. The release in the second band works the same way: in the reply, the company said a winning bidder must release Disney only if it wants Disney's transition services, and that a bidder declining those services need not give the release.

The fee is not in dispute as a number. Disney's $700,000 break-up fee equals 3.5% of its $20 million cash price, and the minimum qualifying overbid is $21.7 million: the price, the fee and a $1 million increment. The sale motion and its terms were set out when Disney budgeted $180m for Character.ai staff and $20m for the bankrupt company. In its reply, the company kept both the fee and the floor, arguing that Disney's hiring and free transition services save the estate more than $5 million, an estimate it did not break down.

What the joinder leaves out

Several things are missing from the four pages. The joinder does not engage with the changes the company proposed on October 27, including a new sentence stating that the bidding procedures order does not approve the full terms of Disney's agreement other than the bid protections, and a clarification that rival bidders need not release Disney in their own sale orders. It asks the court to deny the procedures "as written" without saying whether the revised version answers any of its concerns.

It also contains no figures of its own beyond the $700,000 fee, and no reference to user data, advertising or the consumer privacy ombudsman that the US Trustee has argued for, according to the company's reply. Those issues remain in the coalition's objection, which the eight states adopt by reference and which reserved the ombudsman question for the sale hearing.

The states keep their options open. They 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."

Why this matters for the marketing industry

Character.ai is an ad-supported consumer AI product. Its chief executive's first-day declaration put advertising revenue at about $2.5 million a month against losses of about $8 million a month, as covered when Character.ai lost $8m a month despite $2.5m in monthly ad sales. The Disney license excludes the app, the brand, user data and chats. Those assets stay in the estate, and the rules under dispute will decide on what terms anyone else can bid for them.

The joinder sharpens a question that runs through AI deal-making. If a non-exclusive license can be granted to anyone, and Google already holds one, what is a buyer paying for? The states' answer is people and legal protection: staff hired before the filing, releases signed before the filing, and court findings that make both hard to revisit. That reading matters well beyond one bankruptcy, because the same structure of hiring a team and licensing its technology has become a common way for large platforms to absorb AI start-ups without buying them outright.

The size of the coalition also carries weight for the regulatory side of the business. State attorneys general have been building a record on AI chatbots and children for more than a year; in August 2025, 44 attorneys general warned 12 AI companies, Character Technologies among them, over child safety. In this case, 40 jurisdictions now formally oppose the sale rules, and the same group's notice of interest set conditions for any buyer that include honoring past advertising opt-outs. Whatever the court decides on October 30, the coalition has reserved its arguments on releases and user data for the sale hearing that follows.

Timeline

Summary

Who: Eight states - Alaska, Georgia, Illinois, Indiana, South Dakota, Utah, Virginia and West Virginia - represented by Abigail Rushing Ryan of the National Association of Attorneys General, joining the coalition of 31 states and DC that objected to the sale plan of Character Technologies, Inc., operator of Character.ai, with Disney Worldwide Services, Inc. as stalking horse purchaser.

What: A four-page joinder (Docket No. 79) that adopts the coalition's objection in full, calls Disney's $20 million bid "nothing more than a veiled attempt to buy releases," and sets out a chart arguing that every part of the bid except a non-exclusive license is valuable only to Disney, that Google already holds a 2024 non-exclusive license, and that Disney keeps the workforce, a release from the winner and a $700,000 break-up fee if outbid.

When: Filed October 28, 2026, five days after the October 23 objection deadline, a day after the company's reply and two days before the October 30, 2026 hearing on the bidding procedures.

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

Why: With the joinder, all 39 states and DC that signed the October 14 notice of interest formally oppose the bidding procedures. The states argue the procedures are written around Disney rather than open to higher bids, and the outcome of the October 30 hearing sets the terms on which anyone can bid for the app, its brand and its users' data.