Borders Group Inc's plan to sell customer information to former rival Barnes & Noble Inc hit a snag on Thursday when a judge raised questions about the company's privacy policy.

Bankruptcy Judge Martin Glenn said at a hearing he needed more time to decide whether the policy covers longer-standing customers and whether certain customers must give their consent before the sale can close.

Barnes & Noble won the bulk of Borders' intellectual property assets at auction last week, agreeing to pay $13.9 million. Among other assets, the company would inherit information about customers of its one-time rival, which is going out of business after filing for bankruptcy in February.

While Borders' current privacy policy, implemented in May 2008, makes clear customer information can be sold, questions remain as to whether customers who joined Borders' database before then are subject to the policy and whether they must consent to a sale.

A third-party ombudsman issued a report concluding that certain customers must be given the choice to opt out of the sale.

Barnes & Noble and Borders disagreed, separately filing court papers saying the sale meets privacy standards because Barnes & Noble is a sophisticated company in the same business as Borders, with its own robust privacy policy. The appointment of the ombudsman, they said, was a precautionary measure taken before Borders knew who would win its auction.

But Glenn worried federal and state regulators would see things differently.

You recognize the risk that even if I approve the transaction ... the Federal Trade Commission or state Attorneys General may decide they're not satisfied and they bring an enforcement action, the judge said at Thursday's hearing in U.S. Bankruptcy Court in Manhattan.

A Barnes & Noble attorney voiced concern about the delay, but stressed his client wants the sale to close.

We very much are interested in purchasing these assets, but ... I'm concerned this deal might fall apart over these issues unnecessarily, Paul Zumbro, of law firm Cravath Swaine & Moore, told the judge.

A Borders representative said the company is continuing to negotiate with all parties and looks forward to approval of the proposed sale.

Glenn scheduled a follow-up hearing for Monday.

The auction raised a total of $15.8 million for Borders from multiple bidders buying up different types of IP assets.

Borders has sold assets and conducted store-closing sales since July, when it announced it would liquidate after a proposed sale to buyout firm Najafi Cos fell through.

Once the nation's second-largest book retailer, Borders could not withstand rising competition from online booksellers and from makers of e-readers such as Barnes & Noble's Nook and Amazon.com Inc Kindle.

The case is In re Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-10614.

(Reporting by Nick Brown; editing by Andre Grenon)

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