What happened
U.S. Bankruptcy Judge Brendan Shannon addressed the issue at a Friday hearing in Wilmington, Delaware, where Character Technologies is seeking to sell all or substantially all of its assets through Chapter 11. Quartz, citing Bloomberg, reported that Shannon urged the company to bring on a privacy ombudsman to examine whether its service harms children. He did not order the appointment. In his view, such a role would help address concerns voiced by multiple state attorneys general.
The judge approved an auction for the company's technology. Disney would open with a $20 million bid and would win if no other bidder offered more. Before the bankruptcy filing, Character Technologies reached an agreement with Disney Worldwide Services under which Disney would serve as stalking-horse bidder for a non-exclusive, perpetual license to certain intellectual property and claims. The proposed arrangement includes the $20 million payment and transition services using former Character.AI employees Disney hired.
Quartz also reports that Disney committed $5.5 million before the bankruptcy filing in exchange for permission to recruit Character.AI staff. At the hearing, Abigail Ryan, representing the states, argued that this staffing arrangement tilted the playing field toward Disney. More than 30 states had asked the court to retain the possibility of appointing a privacy ombudsman. They also objected to the bidding procedures on the grounds that they could advantage Disney.
Shannon rejected those objections for the moment, while saying that states could raise some concerns again when the winning bidder seeks approval to close the transaction. The state concerns extend beyond auction mechanics. Character.AI is under investigation or is being sued by officials in Kentucky, Texas, Florida, Pennsylvania, and New Mexico, according to the report. An October 27 filing from U.S. Trustee Andrew Vara said users provide personal details including biographical information and photos. CEO Colin Adams said in a filing that the company is in discussions with a coalition of state attorneys general to settle its probe.
Character Technologies filed for Chapter 11 this month to sell its assets and expects the process to finish in late November or early December 2026. It says the platform will be wound down if no buyer keeps it running. States have argued that a buyer should adopt protections including robust age checks. The source describes a proposed license and transition arrangement, not a completed transfer, final safeguards, or a settled future for the service.
What the archive adds
This is a new fact on a known sale story, rather than a restatement. A Delaware bankruptcy judge approved Character.AI bidding procedures with Disney's $20 million stalking-horse bid on October 31. Character.AI also filed revised bidding procedures after objections from states and the U.S. Trustee. The new development is the judge's nonbinding request for independent privacy scrutiny.
Trend signal
The case weakly supports agent security moving to runtime boundaries. The dispute concerns handling of users and operational safeguards, not a promise that a model will behave responsibly. However, the source describes a proposed ombudsman rather than a technical control, and does not establish which protections a buyer will implement.
Why now
The privacy question is being raised during a court-supervised sale expected to finish in late November or early December 2026. The auction may proceed, but the judge left room for states to renew some objections when the winning bidder returns for approval to close. That makes governance an active issue at the next transaction stage.
Connections to other events
The recommendation follows the auction process and state objections documented in the archive. It also joins the sale to unresolved allegations about child safety and data handling: states have sought safeguards such as age checks, and a federal trustee filing described personal information supplied by users. The source reports concerns and claims, not findings that harm has been proven.
Why it matters
For teams building consumer-facing AI products, ownership changes and asset licenses do not automatically resolve user-protection duties. The Character.AI proceeding shows how privacy and child-safety questions can become transaction questions: who independently evaluates potential harm, which safeguards remain in place, who controls user data, and whether the service continues at all.
The ruling is narrow. An ombudsman was urged, not mandated, and the source does not say that Disney or another eventual buyer has accepted such a role or particular safety obligations. Still, continued state scrutiny and a later closing hearing mean that safeguards may shape the product's operational future. Builders planning transfers, acquisitions, or wind-downs should treat data stewardship, safety controls, and continuity plans as explicit workstreams rather than assumptions carried over by a deal.
Limits and uncertainty
Quartz cites Bloomberg for details of the hearing and state positions; the supplied material does not include the underlying court order or filings. It does not establish that Character Technologies will appoint an ombudsman, what authority that person would have, or whether a buyer will adopt specific safeguards. The $20 million is an opening bid, not necessarily the final sale price. The report also does not establish that investigations or lawsuits have concluded, that alleged harms have been proven, or that Character.AI will remain online after the sale.
Reader takeaway
The court allowed the Character.AI auction to continue without requiring a privacy ombudsman, while signaling that independent scrutiny could help resolve state concerns. For AI product teams, a proposed sale does not settle platform safety, data governance, or service continuity; each requires an accountable plan.
Open question
Will Character Technologies or the eventual winning bidder appoint an independent privacy ombudsman, and what authority would that role have?