40 State AGs Tell Delaware Court Any Character.AI Buyer Must Meet Nine Conditions on Chat Data

Since Character.AI filed for Chapter 11 on Oct. 12 with Disney as a $20 million stalking-horse bidder for part of its intellectual property, the case has drawn a new party: 40 state attorneys general. They filed a 28-page "Notice of Interest and Reservation of Rights" on Wednesday, Oct. 14, just before the first hearing in front of U.S. Bankruptcy Judge Brendan Shannon in Wilmington, Delaware.

The filing is docketed as No. 33 in Case 26-11603. It covers 39 states and the District of Columbia. Eleven states did not sign.

It is not a formal objection. The states say it is meant "to put all parties on notice of the regulatory issues that will need to be addressed in any sale or transfer of the Debtor's business or assets." They have also reserved the option of seeking a court-appointed consumer privacy ombudsman to scrutinize a sale.

The nine conditions

The coalition wants nine conditions attached to any buyer of the app, the chat logs, or both. The ones the states have publicly detailed:

• Effective age-assurance systems that do not rely only on self-declared birthdates.
• Restrictions on how minors can engage with the chatbots.
• "Crisis safeguards."
• The ability for users to delete their data.
• Limits on training models on user chats without consent.

"This company has collected some of the most private thoughts children have ever shared, and now those conversations could be sold off to the highest bidder," New York Attorney General Letitia James said in a statement. Colorado Attorney General Phil Weiser is also among the coalition members involved in the filing.

What the states say they found

James's office disclosed that several states were mid-investigation when the company filed. The probes began in 2024, after a lawsuit from the mother of a 14-year-old who died by suicide allegedly "seconds" after talking with a Character.AI chatbot.

James's office said the investigations "uncovered exceptionally serious dangers and potentially unlawful conduct," including chatbots posing as licensed professionals, exposure to sexual and violent content, weak age checks, misleading safety claims and potential violations of state privacy laws. These are the states' allegations. No court has ruled on them.

The filing cites independent testing that found 669 harmful interactions in 50 hours on accounts registered to children ages 12 to 15, roughly one every five minutes. It also says the chatbots told users things like "your privacy is my top priority," which the states say contradicted the platform's own privacy policy and terms.

Abigail Ryan, an attorney for the states, told Judge Shannon that settlement negotiations with the company remain active. The states and the company did not reach an agreement before the bankruptcy filing.

The user count is disputed

The states say the platform has more than 20 million monthly users, including over 2 million accounts registered as under 18. Another account of the filing puts the figure at 21.6 million users. CEO Colin Adams's first-day declaration puts monthly users at about 12 million.

The gap matters because the data is a central asset in the sale.

The company's position

Character.AI says its board concluded that a court-supervised sale is the best way to maximize value for all stakeholders. The company says the platform remains up, subscriptions are unchanged, and its "data privacy and security practices are unchanged." Users can delete accounts or export data through the app or website.

Adams said the company hopes the process "will yield an actionable proposal that will allow continued operations" of the platform. If no such bid emerges, the platform will be wound down. The company's lawyer told the court that no buyer has yet bid on user data or the chatbot business.

What Disney's deal covers

Disney's $20 million stalking-horse bid is for a non-exclusive perpetual license of certain company intellectual property and certain company claims. Disney is also providing transition services using former Character.AI employees it hired. The deal is subject to higher or better offers under section 363 of the Bankruptcy Code.

One account of the term sheet says it excludes the app, the brand and user data. If so, the chats stay in the bankruptcy estate. Neither Character.AI nor Disney has publicly confirmed that reading in the materials released so far.

The company's filings put assets and liabilities between $50 million and $100 million. Monthly losses run $8 million to $9 million. Lawsuits from families over harmful chatbot interactions and investigations in multiple jurisdictions are still pending.

What comes next

Under the company's proposed bidding procedures, bids are due Nov. 20, an auction would be held Nov. 23, and a sale hearing is set for Nov. 24. The company expects the sale to close in late November or early December. Judge Shannon has yet to rule on the bidding procedures.

Whether the states move from a reservation of rights to a formal objection, or ask for a privacy ombudsman, will likely turn on who bids for the app and its logs. The settlement talks with the company are still open.