Contract Artifacts

In 2020, Serta Simmons and a bare majority of its lenders exploited long-dormant provisions in a standard leveraged loan agreement to subordinate the remaining creditors. The maneuver was decried as "creditor-on-creditor violence" and ultimately rejected by the Fifth Circuit. Contract theory tells us what should have happened next. In a sophisticated, multi-trillion-dollar market, so costly a flaw should have been swiftly repaired. It was not. The standard form was patched at the surface, and the language that made Serta possible remains in place. This Article explains why. Markets, we argue, police standardized contracts only at the surface, the layer practitioners call "what is market", while language at deeper levels of the documentation drifts unattended. We call such instruments contract artifacts. That is, contracts whose surface has hardened into apparent fixity while mistakes, obsolete provisions, and subversive accretions accumulate below the market's ceiling of attention. Drawing on interviews with more than fifty practitioners, we apply the theory to the leveraged loan market and the rise of liability management transactions. The groundwork for the next Serta is already in the standard form.