A bankruptcy judge blocked the sale of Napster Inc. to Bertelsmann AG, killing a deal that might have revived the former song-swap service as a legitimate music-sharing network.

Judge Peter J. Walsh made the ruling Tuesday in Wilmington, Del., according to spokeswomen for both Bertelsmann and Napster.

Bertelsmann had sought to purchase the remains of the defunct Napster network for an additional $8 million after having already sunk $85 million into the Redwood City-based company to keep it afloat. Napster has been off line for more than a year and filed for bankruptcy in June.

Suits by several major record labels effectively destroyed Napster. Those record companies also filed motions in the bankruptcy case, vigorously objecting to the sale of the company to Bertelsmann, Germany's biggest media company.

UPDATE
WSJ elaborates:

The decision by Chief Judge Peter J. Walsh of the U.S. Bankruptcy Court in Wilmington likely means a conversion to Chapter 7 for Napster, which has no revenue stream and no other prospective purchasers. Under Chapter 7, a trustee is appointed by the court to liquidate a debtor's assets.

....In his ruling, Judge Walsh said he couldn't approve the deal because Napster didn't meet the burden of showing it was made in good faith and at arm's length, requirements for such a sale under the Bankruptcy Code.

A major reason Napster failed to meet that burden was its decision to not put its chief executive, Konrad Hilbers, on the stand, Judge Walsh said.

"The deficiency [in evidence] in this case is so apparent it can't be cured by the sale auction process," Judge Walsh said. "It is abundantly clear Mr. Hilbers had one foot in the Napster camp and one foot in the Bertelsmann camp, and so tainted the sale."

Several objecting recording companies and music publishers said that Mr. Hilbers, a former Bertelsmann executive, was more concerned with the interests of his former employer than the interests of Napster and its creditors....