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Napster: Gimme shelter in Chapter 11

The embattled Internet music company files the paperwork in a Delaware court as part of an $8 million deal to become a wholly owned unit of Bertelsmann.

Napster, the struggling online music company, filed for bankruptcy protection Monday.

The filing comes just weeks after Redwood City, Calif.-based Napster agreed to sell its assets to German media conglomerate Bertelsmann for $8 million. As expected at the time of that transaction, Napster said Monday that it has filed under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Delaware.

Napster's service, which provided software that lets people swap music files over the Internet, has been shut down since July 2001 as a result of a lawsuit by the music industry. The company has been trying to strike licensing deals with record companies and music publishers to launch a revived, and legitimate, version of its service but to no avail.

Napster's ambitions have been thwarted by the music industry's unwillingness to deal with the company. Instead, the Big Five record companies have tried to launch their own services, such as MusicNet and Pressplay, which to date have not gained a significant following among consumers who are used to swapping music files for free.

Nevertheless, Monday's filing does not spell the end for Napster because under Chapter 11, the company can--and is likely to--reorganize. Napster still expects to launch its long-delayed service.

"The Chapter 11 process will allow the company to move forward with a talented team and continue on the path toward launch, while pursuing a plan to make payments to our creditors," Napster CEO Konrad Hilbers said in a statement.

Napster's financial outlook remains standing on shaky ground, however. Its assets were valued at $7.9 million, but the company has $101 million in liabilities, according to a Napster representative.

One of Napster's largest creditors is the law firm of David Boies, the company's star attorney who unsuccessfully defended it in the recording industry's lawsuit. Napster owes $2.1 million to Boies' firm, according to the bankruptcy filing.

A Napster representative said the company's debts include some $91 million owed to Bertelsmann that would be forgiven if the court accepts its buyout offer. While other bidders could step in with counter offers, none have yet emerged.

The bankruptcy filing puts on hold a copyright infringement suit brought against Napster last year by the major record labels. While that case has not reached a conclusion, the record labels may now bring their claims before the bankruptcy court for settlement.