(Recasts to add comments and recovery details)
By Tracy Rucinski and Tom Hals
March 9 (Reuters) - A U.S. judge rejected Breitburn Energy Partners LP's bankruptcy exit plan on Friday, dealing a blow to a bid by investors led by Elliott Management Corp and WL Ross & Co to acquire choice oil and gas reserves in West Texas.
The parties must now renegotiate a deal that would transfer Breitburn's Permian reserves to investors including Elliott and WL Ross, founded by U.S. Commerce Secretary Wilbur Ross, through their participation in a $775 million rights offering.
In a 68-page written ruling, U.S. Bankruptcy Judge Stuart Bernstein in New York said the plan, which meant to reduce Breitburn's $3 billion in debt, discriminated against retail bondholders.
Elliott declined comment, while Breitburn and WL Ross did not return requests for comment.
"We think this is solvable," a source with knowledge of the proceedings told Reuters, saying it may only require a small adjustment.
The judge rejected the plan because institutional bondholders were recovering more than twice the amount offered to individuals holding the same bonds, who were getting 4.5 cents on the dollar. Retail investors only hold about $45 million in bonds, so Breitburn could double their recovery for a few million dollars.
Judges rarely reject large corporate Chapter 11 plans, in part because the parties generally reach a broad consensus before seeking court approval.
When a similar complaint by retail bondholders surfaced last year in the bankruptcy of the largest U.S. coal miner, Peabody Energy Corp, the company settled with the individuals and its plan won court approval.
Breitburn, which also owns oil reserves in California, the Rocky Mountains, the U.S. Midwest and Southeast, filed for Chapter 11 bankruptcy in 2016 after a lingering slump in commodity prices.
As commodity prices have recovered from lows, the plan's opponents said Breitburn's reserves had increased in value and justified a greater recovery for creditors and equity holders.
Equity holders had argued the company's valuation was double the $1.8 billion estimated by Breitburn's investment banker, but Bernstein rejected their calculations and said they were hopelessly "out of the money."
Shareholders normally lose their investment in a bankruptcy, but the Breitburn case is particularly painful for equity investors because the company is structured as a master limited partnership, which treats cancelled debt as taxable income. This means shareholders could be stuck with a tax charge.
The ruling follows an unsolicited $1.8 billion cash offer by Lime Rock Resources that was rejected by Breitburn. (Reporting by Tracy Rucinski Editing by Chizu Nomiyama and Tom Brown)