Blockbuster Won't Liquidate

Updated with additional details, background.

NEW YORK ( TheStreet) -- Blockbuster ( BLOAQ.PK) and its creditors have reached an agreement on the sale of the company.

The revised deal received a favorable ruling from the bankruptcy court reviewing the company's reorganization Thursday, allowing the flailing movie retailer to avoid a Chapter 7 liquidation filing.

>>Blockbuster Timeline: From Opening to Closing Credits

"The parties have come to an accord and presented us with a more palatable situation," said U.S. Bankruptcy Judge Burton Lifland in Manhattan.

The agreement sets up an auction. A date has not yet been set.

A list of 45 creditors, including Walt Disney ( DIS), Yahoo ( YHOO) and Sony ( SNE), had previously opposed a "stalking horse" bid of $290 million Blockbuster received in February from Cobalt Video, a limited liability company formed by funds managed by Monarch Alternative Capital, Owl Creek Asset Management, Stonehill Capital Management and Värde Partners.

Even Judge Lifland last week opposed the bid, calling it too "aggressive." "If anything is going to fly, this garbage truck better sprout wings," he said in Manhattan court.

The parties were able to agree that if the consortium were to purchase Blockbuster, it could not force the company into Chapter 7, which would essentially liquiate it.

Under the agreement, movie studios and other creditors would receive more money upfront for what they are owed and would receive a share of any offer about the $290 million bid.

Blockbuster owes major studios like Fox, Warner Brothers and Paramount about $100 million in administrative fees. They will receive about 24% of that money right away if a deal is completed by Cobalt.

Unsecured lenders could get up to $7.5 million of the approximately $40 million Blockbuster owes them and also share in the money from any higher bid.

Separately, Lifland said Carl Icahn and his funds are allowed to bid for Blockbuster in an auction. This comes after one junior creditor said the billionaire should not be able to participate in an auction.

Blockbuster filed for a Chapter 11 bankruptcy reorganization at the end of September, at the time saying it would continue to operate stores and pay employees.

It was speculated that Blockbuster would be forced to enter Chapter 7 liquidation, following the path of now defunct rival Movie Gallery.

-- Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

>To follow the writer on Twitter, go to http://twitter.com/jpoggi.

>To submit a news tip, send an email to: tips@thestreet.com.

RELATED STORIES:


More from Stocks

Jim Cramer: Schlumberger Predicted the Rise in Oil Prices

Jim Cramer: Schlumberger Predicted the Rise in Oil Prices

Jim Cramer on Zillow's New Business: Buying and Selling Homes

Jim Cramer on Zillow's New Business: Buying and Selling Homes

Jim Cramer: Wabtec Deal Gives General Electric Optionality

Jim Cramer: Wabtec Deal Gives General Electric Optionality

Jim Cramer on the Markets: It's Natural to Have Some Profit Taking

Jim Cramer on the Markets: It's Natural to Have Some Profit Taking

Video: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Video: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron