Tennessee Attorney General Jonathan Skrmetti and a coalition of 40 state attorneys general have filed a notice of interest and reservation of rights in the Chapter 11 case of Character Technologies, Inc., the company behind Character.AI, 3B Media News reported on 23 October 2026. The states say they want to ensure the company cannot use the bankruptcy to sidestep consumer protection law.
What we know
The coalition's stated concerns are the company's safety practices, its handling of sensitive data including conversations and mental-health disclosures from children, and the potential for AI companions to foster emotional dependence in minors, according to 3B Media News.
The states have also challenged the sale process. PPC Land reported that their objection of 23 October asked the Delaware bankruptcy court, among other things, to extend the bid deadline, remove a clause treating silence as consent, and give plain-language notice to people with personal-injury claims. A company filing on 3 November said Judge Brendan Shannon had indicated at a 30 October hearing that he would overrule the objections subject to revisions. The deemed-consent clause was deleted and the timetable moved back.
The states and the US Trustee have asked for a consumer privacy ombudsman. The Record reported the Trustee's view that the privacy policy is ambiguous on whether chats can be sold. PPC Land said the revised order does not address the request.
Disney is the stalking-horse bidder at $20 million for an intellectual-property licence. The protections it seeks, including a sale free and clear of claims and findings that it is not a successor to the company, were left for the sale hearing on 3 and 4 December, PPC Land reported.
Why it matters
This is the first time state enforcers have had to pursue companion-chatbot concerns through a bankruptcy court rather than a consumer-protection action. The practical issue is successor liability: if assets pass free and clear, claims and regulatory obligations may stay with an estate that has little money. A reservation of rights keeps the states' police and regulatory powers on the record before that happens.
It also tests how far privacy promises made to users, many of them minors, bind a buyer. Operators should expect regulators to treat chat logs as a protected category in any future sale or merger. Data duties under current state laws are summarised in our compliance checklist.
What to watch
Sale objections are due on 18 November. The December hearing will decide whether Disney's requested releases and injunctions are granted.
Written by the AI Companion Policy newsroom from public reporting, credited above. Image via 3B Media News.
