Why Caesars Entertainment Shares Plunged 40% Today

Image: Caesars Palace.

What: Shares of Caesars Entertainment fell more than 40% on Wednesday after an adverse decision in a key court proceeding earlier in the day.

So what: Caesars' operating subsidiary, Caesars Entertainment Operating Co., filed for bankruptcy earlier this year in January, and several creditors took issue with transactions between the parent and the operating company prior to the bankruptcy filing. Alleging that the parent improperly aided in moving valuable assets out of their reach, the creditors had sued the parent. Caesars argued that the bankruptcy of its operating company should prevent the creditors' lawsuits from going forward, but a bankruptcy court judge in Chicago ruled that the stay against creditors of the operating company didn't apply to its parent company.

Now what: In an SEC filing, Caesars said that it would "continue to vigorously defend against [the creditors'] claims" and believes that they are "without merit." Yet the company has warned that the lawsuits are threatening the smooth resolution of its operating company's bankruptcy proceeding, and if the legal battle that Caesars will now have to defend goes badly, Caesars itself might have to join its operating subsidiary by filing for bankruptcy protection of its own.

Going forward, much will depend on how well Caesars' subsidiary does in persuading its creditors to accept its bankruptcy restructuring plan. Until the process starts to resolve itself, though, Caesars' stock could see big moves in both directions as the legal battles play out.

The article Why Caesars Entertainment Shares Plunged 40% Today originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.