Overview

In the 23andMe case, Chapter 11 placed the debtor’s property in the bankruptcy estate, but that entry rule did not answer whether the estate could sell personally identifiable information free of outside limits. The court rejected blanket preemption: Section 363 provided sale authority and a process for privacy-policy conflicts, while the petition-date Privacy Statement and Consumer Privacy Ombudsman review were only part of a multi-gate analysis. State law, customer rights, transaction facts, access, purpose, and safeguards remained relevant. The court could approve the specific sale without holding that bankruptcy overrides generally applicable privacy rules or that every state restriction defeats a sale.

Learning outcomes

Section 541(c) addressed property entering the bankruptcy estate; it did not automatically authorize unrestricted sales out of the estate.
The petition-date Privacy Statement mattered under Section 363, but it could not by itself override statutes or customer rights.
The 23andMe court rejected blanket preemption without adopting a blanket state-law veto.

Keywords

23andMepreemptionprivacySection 363policyombudsman

Why Bankruptcy Did Not Override Privacy Law

The 23andMe sale raised a legal question broader than whether the bankruptcy court could authorize a transaction. It asked whether the Bankruptcy Code displaced the privacy rules that would apply outside bankruptcy. The court’s answer was no blanket exemption: Section 363 supplied a route for selling estate property, and the debtor’s privacy policy mattered, but generally applicable state law still had to be considered. That distinction explains why a genetic-data bankruptcy sale can be legally possible without making sensitive information an unrestricted ordinary asset.

Property entering an estate is not the same as property leaving it

Bankruptcy law uses different rules for different moments in a debtor’s life cycle. When a company files for Chapter 11, its property becomes property of the bankruptcy estate. A provision known as Section 541(c) says, in relevant part, that this happens despite some non-bankruptcy rules that would otherwise restrict or condition a transfer into the estate. In plain language, a debtor cannot keep an asset outside the estate merely because another rule would make the asset harder to transfer.

But that rule answers the entry question, not the exit question. The 23andMe case involved a proposed sale out of the estate. The debtors argued that the Bankruptcy Code broadly preempted—or displaced—state restrictions on the sale of personally identifiable information. If accepted, that theory would mean that a company could take advantage of bankruptcy to transfer information in ways that state law would otherwise forbid, especially if its privacy policy was written permissively.

The court found no such general permission. Section 363(l) addresses a narrower problem involving laws that condition a debtor’s property interest on insolvency or the commencement of a bankruptcy case. Section 363(d)(1) requires a non-profit debtor to comply with non-bankruptcy law when selling property, but 23andMe was a for-profit debtor. Neither provision created a universal rule for a for-profit company selling sensitive information.

The court instead relied on the broader principle that a bankruptcy estate generally cannot possess or transfer more than the debtor itself could possess or transfer outside bankruptcy. The judge pointed to Eighth Circuit precedent rejecting the idea that bankruptcy automatically frees a trustee from state or contractual restrictions on property. The Bankruptcy Code can change the forum, the timing, and the remedies. It does not silently turn every regulated asset into an unregulated one.

That principle has practical force beyond genetic testing. Non-bankruptcy law limits the transfer of many sensitive or specially regulated things, from firearms and controlled substances to securities and human organs. The court saw no reason to assume that Congress intended privacy rules to vanish whenever a custodian became insolvent. A rule that treated bankruptcy as a universal privacy waiver would let a company choose financial distress as a way to obtain authority it never had while operating normally.

Section 363 is a gate, not a privacy waiver

Section 363(b)(1) contains a special provision for personally identifiable information.

Published by DeepMox

FAQ

What is the difference between Section 541(c) and Section 363 in the 23andMe case?

Section 541(c) governed property entering the bankruptcy estate, while Section 363 governed the proposed sale out of it and the conditions the court had to consider.

Did 23andMe’s privacy policy authorize the bankruptcy sale?

The court held that the formal petition-date policy authorized or at least did not prohibit the sale; it did not answer state-law or customer-rights questions by itself.

Can state privacy law still limit a bankruptcy sale of genetic data?

Yes. The court held that bankruptcy did not automatically displace generally applicable state law, although a particular restriction might be inapplicable or preempted under recognized doctrines.

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Why 23andMe Bankruptcy Did Not Override Privacy Law

Why Bankruptcy Did Not Override Privacy Law

Property entering an estate is not the same as property leaving it

Section 363 is a gate, not a privacy waiver

FAQ