Stacks of plain, taped cardboard boxes stand beside rows of empty desks with dark monitors and pushed-in chairs in an open-plan office with tall factory windows at dusk, a few ceiling lights still on.

Bankruptcy

States Say Character.AI’s Auction Rules Favor Disney

Thirty-one states and D.C. object: Disney estimated about $180 million over three years for the Character.AI staff it offered jobs, against at most $20 million for the estate.

WILMINGTON, Del., Oct. 23 — Disney has already hired most of Character.AI’s staff. On Friday, 31 states and the District of Columbia asked the bankruptcy court here to reject the rules for auctioning the rest of Disney’s deal, chiefly a license to the chatbot company’s technology, or to approve them only with changes. Disney estimated the compensation and retention of the employees it offered jobs at about $180 million over three years, the states wrote, while Character.AI’s estate gets at most $20 million.

The states do not ask Judge Brendan L. Shannon to unwind the decisions Character Technologies, the company behind Character.AI, made before filing for Chapter 11 on Oct. 12. They ask, they wrote, “that the Court not use a bidding procedures order to bless them.” He is to hear the procedures on Oct. 30 at 10 a.m. Eastern.

The case tests a way of buying into an AI start-up without buying the company: hire the people, license the technology and leave the liabilities behind. Those stay with an estate that had about $57 million in cash and investments when it filed and burns $8 million to $9 million a month, the states wrote, citing the company’s first-day declaration. Citing it again, they wrote that the claims against the company arise largely from minors’ use of the platform and that 46 states and territories are investigating it. The declaration itself says one personal-injury suit, filed in August, is outstanding, after a January settlement of those filed earlier.The CoalitionThirty-one of the 39 states that, with the District, filed a notice of interest on Oct. 14 signed the objection; Alaska, Georgia, Illinois, Indiana, South Dakota, Utah, Virginia and West Virginia did not.

Before filing, Character.AI let Disney hire its staff, chief executive included, and released Disney and the hires from claims “from the beginning of time.” Disney paid $7.5 million, $5.5 million of it “non-refundable in all circumstances.” What is for sale now is a non-exclusive license to some of the company’s technology and patents, plus any unreleased claims against the staff Disney hired, for $20 million in all.Who Is LeftOf about 86 full-time employees, 66 accepted Disney’s offers. The company now reports 18 active full-time employees, eight of whom are expected to stay through key parts of the case, the states wrote, citing its declaration.

The Arithmetic

A rival must bid at least $21.7 million, but any bid above about $15.2 million would leave the estate better off, the states argue, because it keeps $5.5 million of Disney’s money whatever happens.The Break-EvenIf Disney wins, the estate gets $20 million. If a rival wins, the estate keeps the $5.5 million, refunds Disney’s $2 million deposit and pays it a $700,000 break-up fee, netting the rival’s bid plus $4.8 million. The two are equal at a bid of $15.2 million. “Excluding value-maximizing bids is the definition of a chilling term,” they wrote.

Rivals also face terms Disney does not, the states say: they must close by Nov. 30, against Disney’s Dec. 17, and Disney may put up to 20 percent of its hires off limits to a winner’s recruiters. Of the bid protections, up to $700,000, which they want denied or cut, the states wrote: “A party that keeps the most valuable part of the deal when it loses has little need to be compensated for losing.”

A party that keeps the most valuable part of the deal when it loses has little need to be compensated for losing.

— The states, in their objection

The states ask Judge Shannon not to find now that the procedures were “negotiated in good faith and at arm’s length,” nor to sell Disney the estate’s claims against its new hires: together, they say, those steps would in effect ratify releases, “including releases of an insider,” before any creditors’ committee exists. A buyer of those claims, they wrote, “is not purchasing an asset it intends to enforce. It is obtaining a release under another name.”

They also want at least 21 more days for bids, one closing date for all bidders and a plain-language notice to injury claimants and users, posted “on the Character.AI platform itself.” The platform has about 12 million monthly active users, by the company’s estimate as the states cite it. As proposed, sale objections are due Nov. 13, a week before bids; the auction is set for Nov. 23 and the sale hearing for Nov. 24. The states reserved the right to seek a consumer privacy ombudsman, because Disney staff have access to users’ personal data under the transition agreement.

The Company’s Case

The company’s banker, Adam Dunayer, has defended the pace: the business “was previously marketed for over a year,” “many potentially viable prospects for such a purchase have already been contacted,” and the company “cannot afford a longer Sale Process due to the Debtor’s high operating costs,” he declared.

In its sale motion, Character.AI said it had faced “mounting employee attrition,” a “genuine operational risk” for a platform it cannot run “without key personnel to monitor and ensure user safety at all times.” Character.AI says the two-stage deal avoided what it feared “could be a precipitous and value-destructive liquidation due to sudden employee attrition.” Independent directors led the deal, it says, and Mr. Dunayer declared that without the break-up fee Disney “would not have agreed to serve as stalking horse” at that value.

“The States do not question the independence of the directors involved,” the states wrote. “The point is that the prepetition market check on which the Debtor relies did not test the transaction actually before the Court.” Mr. Dunayer’s firm, his declaration says, was not involved in the September negotiations.

No reply from Character.AI or Disney appeared in the court record available through CourtListener as of early Monday.

Sources

  1. U.S. Bankruptcy Court, District of Delaware, “The Coalition of States’ Objection to the Debtor’s Bidding Procedures Motion, In re Character Technologies, Inc., No. 26-11603 (BLS), D.I. 66,” Oct. 23, 2026.
  2. U.S. Bankruptcy Court, District of Delaware, “Debtor’s Bidding Procedures and Sale Motion, No. 26-11603 (BLS), D.I. 15,” Oct. 13, 2026.
  3. U.S. Bankruptcy Court, District of Delaware, “Declaration of Adam Dunayer in Support of the Debtor’s Bidding Procedures Motion, No. 26-11603 (BLS), D.I. 17,” Oct. 13, 2026.
  4. U.S. Bankruptcy Court, District of Delaware, “Declaration of Colin M. Adams in Support of the Debtor’s Chapter 11 Petition and First Day Motions, No. 26-11603 (BLS), D.I. 18 (via Stretto),” Oct. 13, 2026.
  5. U.S. Bankruptcy Court, District of Delaware, “Notice of Interest and Reservation of Rights by the Coalition of the State Attorneys General, No. 26-11603 (BLS), D.I. 33,” Oct. 14, 2026.
  6. CourtListener, “Docket (RECAP): In re Character Technologies, Inc., No. 26-11603 (Bankr. D. Del.),” Oct. 26, 2026.