Disney has found what might be the corporate equivalent of a legal escape hatch: convince a troubled AI startup to declare bankruptcy, then buy its assets without touching its liabilities.

The company is pursuing Character.AI’s technology through a bankruptcy acquisition that would let Disney walk away from dozens of lawsuits alleging the startup’s chatbots encouraged minors to self-harm and even kill their parents. It’s a creative solution to a messy problem, and it’s raising eyebrows among legal experts who see it as an end-run around accountability.

The Legal Mechanics

The strategy relies on Section 363 of the bankruptcy code, which allows companies to sell assets free and clear of liabilities during Chapter 11 proceedings. It’s a standard tool for acquiring distressed companies, but it’s typically used when a business fails on its own. Here, according to Wired’s reporting, Disney appears to have requested that Character.AI pursue bankruptcy specifically to enable this type of clean acquisition.

That distinction matters. If Disney simply acquired Character.AI through a normal deal, it would typically assume at least some liability for the company’s alleged wrongdoing under successor liability doctrine. Bankruptcy proceedings can cut off that chain entirely, leaving plaintiffs with claims against a hollowed-out shell company while Disney gets the IP it wants.

The families suing Character.AI don’t have many good options to stop this. They can object to the sale in bankruptcy court, arguing it’s being done in bad faith or that Disney is effectively a continuation of the same business. But judges approve 363 sales all the time, especially when they’re the only way to preserve value for creditors.

What Disney Actually Wants

Disney isn’t after Character.AI’s brand, which is currently toxic. The company wants the underlying technology, particularly the trust and safety systems the startup developed to manage conversational AI. That’s valuable IP for a company planning to deploy AI characters across its entertainment properties.

The irony is thick. Character.AI built those safety systems in response to the exact problems that spawned the current lawsuits. Now Disney wants to acquire that technology while leaving the victims of its failures behind.

The Broader Pattern

This isn’t the first time we’ve seen companies use bankruptcy to shed AI-related liabilities. But the Character.AI situation is notable because the alleged harms are so serious and because Disney appears to have orchestrated the bankruptcy rather than simply taking advantage of one that occurred naturally.

That orchestration is where things get legally interesting. Bankruptcy courts have discretion to reject sales they view as improper, and there’s case law establishing that 363 sales can’t be used purely to avoid liability. The question is whether Disney’s involvement in pushing Character.AI toward bankruptcy crosses that line.

Plaintiffs’ attorneys will likely argue this is a de facto merger dressed up as a bankruptcy sale. If they can show Disney exercised enough control over Character.AI’s decision to file, or that the companies are functionally continuous, they might be able to pierce the transaction and maintain their claims.

What Happens Next

The bankruptcy court will need to approve any sale, and that’s where the families will have their chance to object. They’ll argue Disney is the real party in interest and that allowing the sale would let the company profit from Character.AI’s technology while escaping responsibility for the harm it allegedly caused.

Disney will counter that it’s simply a purchaser of assets from a failed company, that the bankruptcy code explicitly allows these transactions, and that blocking the sale won’t help the victims anyway since Character.AI has limited resources.

The judge will have to balance the bankruptcy code’s goal of maximizing asset value against the equitable concerns of letting a deep-pocketed acquirer dodge liability for serious alleged harms to minors. It’s not a clear call.

Meanwhile, state attorneys general from dozens of states are pursuing their own claims against Character.AI. Those cases could potentially follow Disney even through a bankruptcy sale, since government enforcement actions sometimes survive asset purchases that wipe out private claims.

This case is worth watching because it could set a precedent for how AI companies and their acquirers handle liability. If Disney succeeds in getting Character.AI’s technology without its legal baggage, expect other companies to take notes. If the bankruptcy court blocks the sale or if plaintiffs find a way to maintain their claims post-acquisition, it’ll signal that courts won’t let corporate structure games shield companies from accountability for AI harms.

For now, families whose children were allegedly hurt by Character.AI’s chatbots are watching a major corporation try to profit from the same technology that harmed their kids while leaving them with claims against a bankrupt shell. Whether the courts allow that to happen will tell us a lot about how seriously the legal system takes AI safety failures.