Summary:

The messy liquidation of Borders has taken a new twist. Barnes & Noble (NYSE: BKS) indicated in a court filing late yesterday that it would…

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The messy liquidation of Borders has taken a new twist. Barnes & Noble (NYSE: BKS) indicated in a court filing late yesterday that it would seek to back out of its $13.9 million purchase of its former competitor’s intellectual property assets if a bankruptcy judge forces it to abide by privacy recommendations for Borders’ customer list.

Barnes & Noble won the rights to the lion’s share of Borders’ intangible assets such as its customers lists and trademarks in an auction last week. The sale requires the approval of a federal judge. A hearing is set for 2:00pm today in New York.

The approval process, which is often a formality, hit a snag yesterday when Borders and Barnes & Noble both filed requests asking the court to cross out certain privacy recommendations tied to the sale. One recommendation says that Barnes & Noble is not entitled to have access to customers who joined Borders prior to mid-2008 unless those customers give explicit permission to share their personal information. Another bars Barnes & Noble from obtaining any information about customers who purchased video materials.

The recommendations were made in a report by the Consumer Privacy Ombudsman, an independent expert tasked with protecting personal information in the course of bankruptcy proceedings. The ombudsman’s recommendations are based on federal privacy law and on the fact that Borders changed its privacy policy in 2008. The report says that the old Borders privacy policy, which limited the transfer of personal data, should continue to apply to those who signed up under its terms.

In its court filing, Barnes & Noble says that the privacy recommendations “destroy the value of the transaction” and accuses Borders’ attorneys of failing to disclose the existence of the privacy report and of related correspondence from federal and state authorities. The company says this concealment provides grounds for it to walk away from the sale if the privacy recommendations are upheld. It also argued that its own privacy policy is as good or better than that of Borders and that the collapse of the sale would be a lost opportunity for all involved.

Borders’ filing says that its customer list contains information about 48 million individuals in one form or another.

Both Barnes & Noble and Borders have put forth legal arguments to say that the privacy recommendations are inconsistent with federal bankruptcy law and should not be part of the terms of the sale. The federal bankruptcy judge overseeing the case will have the final say in the matter.

Last week’s auction also saw Pearson (NYSE: PSO) obtain rights to Borders in Australia and New Zealand for $425,000 and Berjaya Books get the rights to Malaysia for $825,000.

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