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September 3 deadline. The record labels and the music publishers fought the deal and won access to Napster and Bertelsmann documents and the right to conduct depositions of Hilbers, Lyn Jensen, and Bertelsmann's Bill Sorenson.

The music companies argued that Bertelsmann hadn’t acted like a regular lender when it first gave Napster money, but as a disguised equity investor. In bankruptcy law, the distinction is critical. If Bertelsmann was really a secured lender, than it could count its $85 million in loans and have a giant head start on any other bidder for Napster’s remains. If it was an equity investor, then the value of its holdings would be virtually wiped out alongside those of Hummer Winblad and the Fannings, and everyone would start from the same place in the bidding.

The allegations were somewhat unusual, and Napster accused the labels of vindictively trying to destroy what was left of the crippled company. Few expected the music industry’s arguments to sway the judge. But once discovery got under way, the industry’s lawyers turned up a raft of evidence that Bertelsmann’s relationship with Napster was far different from that of a normal creditor. To begin with, Jensen testified that she couldn’t get a bank loan at any interest rate before Bertelsmann stepped in. Bertelsmann not only made a massive loan, they did it at the remarkably low rate of 6.1 percent—more than three percentage points below the prime rate. And when Napster failed to make its payment, Bertelsmann did nothing more than send a letter complaining. The evidence also showed that Bertelsmann was thinking from the beginning that a bankruptcy would turn its low-risk loan into ownership.

More seriously, there was the matter of management control. Hilbers may have acted to the outside world like an independent thinker, but his e-mail was littered with direct orders from Middelhoff, his former boss, who had given Hilbers permission to take the Napster job in the first place. Then there were the internal documents, especially the Middelhoff memo from 2000, suggesting Bertelsmann knew that Napster users were breaking the law. And despite the claims that the $60 million in initial funding was going toward the development of a legally sound system, Bertelsmann executive Bill Sorenson conceded in his deposition that much of it was used for regular operating expenses during the eight months that the old Napster was around. Not only that, but Bertelsmann

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