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A U.S. bankruptcy judge said he won't allow Netflix Inc. to debut two films on its streaming service ahead of their theatrical release, which the studio behind the films says is crucial to its fragile reorganization plan.

Judge Michael Wiles of the U.S. Bankruptcy Court in New York stopped short of handing down a final ruling Tuesday, but he made clear that the potential damage from the premature release of the films could jeopardize his work to revive the troubled studio, Relativity Media LLC, which he released from chapter 11 less than two months ago.

"I am hard pressed to think that I would ever authorize you to release these movies on Netflix before they are theatrically released," the judge told Netflix's lawyer. "It seems to me that you are urging a provision that would destroy them."

Another hearing on the matter is slated for May 19.

"Masterminds," a heist comedy starring Zach Galifianakis and Kristen Wiig, and "The Disappointments Room," a horror film starring Kate Beckinsale, are the first of as many as 22 films Relativity hopes to release over the next few years. The two films had originally been scheduled for release in theaters in the U.S. last year, but those plans were shelved after Relativity filed for bankruptcy last summer.

The company's reorganization plan, which won final court approval in March, now calls for the two films to be rolled out in theaters in September and December and later released abroad and on streaming services. Relativity says Netflix's threats to upend that timeline "flies in the face of long-standing industry practice."

Hollywood isn't expecting blockbuster hits from "Masterminds," or "The Disappointments Room," but the online release of the movies could nonetheless be devastating to the films' box-office rollout.

In court papers, Relativity's lawyers said the studio's business model calculates projected revenues "pursuant to the time-honored industry practice of an exclusive theatrical release for its films." The studio is counting on revenue tied to the theatrical releases of the films both in the U.S. and abroad to repay its creditors.

A lawyer for Relativity also said that the company's reorganization plan would be jeopardized if forced to abandon plans to show the films in theaters.

Scott McNutt, Netflix's lawyer, told the judge Tuesday that its contracts with Relativity clearly give it the right to buy the films and release them ahead of the theatrical release.

"We did not make this bizarre situation," he said. "This is an absurd and wholly unintended consequence of this bankruptcy."

Netflix also argued now that Hollywood studio's reorganization plan has been completed, a Manhattan bankruptcy court is no longer the proper venue to settle its disputes with other companies.

"We believe that this is a situation that cries out for arbitration," Mr. McNutt said. "It's now time to kick these little birdies out into the open air to see if they can fly."

Netflix was a vocal opponent of Relativity's reorganization, hitting it with objections that questioned its feasibility. But its objections were overruled, leaving it stuck with a long-standing contract that obligates it to buy Relativity's films.

Judge Wiles cautioned both sides not to let "bad blood" drive their disputes and not to treat disagreements over contracts "as matters of personal honor or matters that have to be litigated."

"I would hope that there are business people on both sides that can approach this reasonably," the judge said. "You ought to be able to work this out."

Relativity and a long list of affiliates filed for chapter 11 protection in July and laid off one-fifth of its workforce. When it filed for bankruptcy, Relativity listed assets of $560 million and debts of $1.2 billion, court papers show.

After lurching from calamity to comeback, the studio won court approval of deals that spun off its lucrative television unit to a group of hedge funds and cut the company's debt by about $1 billion.

Erich Schwartzel contributed to this article.

Write to Tom Corrigan at tom.corrigan@wsj.com

(END) Dow Jones Newswires

May 10, 2016 17:55 ET (21:55 GMT)

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