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In its latest setback, Napster announced Tuesday that Konrad Hilbers will step down as CEO of the online file-swapping service.

The departure of the exec, who took the reins of Napster last July, comes as the company has been unable to close a much-needed sale to German media giant Bertelsmann and still faces a round of lawsuits from the major record labels. It may also be close to filing for bankruptcy.

Napster’s quarreling board of directors opposed a takeover by Bertelsmann. Hilbers had been shepherding the sale for some time, with the intention of turning Napster into a legal online music service through partnerships with the major record labels. None have yet to be signed.

The management team “has put together what I consider to be a valid and beneficial deal for Napster over the last weeks,” Hilbers wrote in a recent e-mail to Napster staffers. “Unfortunately, the board has chosen to not pursue the deal. I am convinced that not pursuing the offer is a mistake, and it will lead the company to a place where I don’t want to lead it.”

Because Bertelsmann had bankrolled Napster with tens of millions of dollars in loans and is likely its largest creditor, the company could still gain control of Napster and its technology should it file for bankruptcy.

Napster has not been generating any revenues since opening its doors in 1999 and has been living on over $85 million in loans from Bertelsmann. The conglom also had promised to pay tens of millions of dollars in additional legal settlement and music licensing fees.

“We deeply regret that we have not yet been able to find a funding solution that would allow Napster to launch a service to benefit artists and consumers alike,” Napster said in a statement. “We will be looking at additional steps in the coming week to further reduce expenses. We regret that the Napster shareholders were unable to reach an agreement regarding the offer from Bertelsmann. However, we continue to believe in the value of peer-to-peer technology. We are hopeful that Napster’s brand and technology will be able to realize its potential as a compelling consumer proposition.”