Blockbuster Inc. will proceed with an auction that could preserve the bankrupt video-rental chain after reworking the sale plan to win the support of Hollywood studios, a company lawyer said at a court hearing.

Hedge funds led by Monarch Capital that submitted a $290 million initial bid for the company reached an agreement that won over creditors who said the original sale plan shortchanged them.

Numerous creditors had asked the Bankruptcy Court judge to convert the bankruptcy to a Chapter 7 liquidation, essentially a going out of business sale, rather than proceed with the company’s original sale plan.