Days after a judge rejected its bankruptcy exit plan, Breitburn Energy Partners on March 13 submitted an amended recovery plan that boosts cash payouts to holdout creditors. A tentative agreement was also reached to limit tax liabilities for shareholders.

The move by the bankrupt downtown Los Angeles oil partnership came four days after U.S. Bankruptcy Court Judge Stuart Bernstein rejected Breitburn’s recovery plan that would split the company into two creditor-owned entities. Bernstein ruled that plan treated individual bondholders differently than a select group of institutional bondholders.

On March 12, attorneys for Breitburn and attorneys representing a group of noteholders and shareholders that had held out against the bankruptcy exit plan met with Bernstein and reached a tentative deal. That deal called for Breitburn to offer the same cash recovery opportunity for the individual bondholders as it has to the institutional bondholders, according to a Reuters report.

The plan amendments filed on March 13 keep the general structure of splitting the company into two entities – one containing prime oil assets in the West Texas Permian Basin and the other containing the remaining assets in the Rocky Mountains, California and the upper Midwest. But they contain more cash recovery provisions for unsecured noteholders. The cash recovery rate for one group of unsecured noteholders was nearly tripled to 11.94 percent from 4.5 percent.

Separately, the creditors who will own the two successor companies have tentatively promised not to turn these companies into corporate entities. That would likely avoid the hefty tax bills that shareholders were facing as debts were forgiven through the bankruptcy process, according to Martin Bienenstock, an attorney with Proskauer Rose, the law firm representing Breitburn shareholders.

Because of Breitburn’s master limited partnership structure that allows for more pass through of profits to shareholders, any debts cancelled through bankruptcy are treated as taxable income for shareholders. Proskauer Rose attorneys had calculated the bankruptcy exit plan would have forgiven roughly $525 million in debt, which would count as taxable income for shareholders at the rate of about $2 a share. Since Breitburn shares are practically worthless (1.3 cents a share as of close on March 14), larger shareholders would have had to dig into their own pockets to satisfy five- and six-figure tax bills.

Breitburn filed for bankruptcy in May 2016, one of many oil companies hit by the oil price collapse of late 2014-2015. The partnership was hit especially hard because it incurred $2 billion in debt to finance a purchase of another oil company just three months before the market imploded.

Economy, education, energy and transportation reporter Howard Fine can be reached at Follow him on Twitter @howardafine.

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