IANAL, but AIUI, the situation is somewhat analogous to “debtor in possession”.

For example, if a “factory and everything in it” is sold in a bankruptcy auction, the buyer doesn’t get the vending machines owned by the 3rd party caterer. The vending machines are in possession of the debtor, but not owned by him. So the bankruptcy court can’t transfer them.

X is arguing that users do not own their handles, so X cannot be compelled to transfer a handle from one user to another as part of a bankruptcy auction.