May 28, 2022

Volume XII, Number 148

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Ransomware: An Enterprise Risk for the Unprepared

For a company with robust data protection and recovery practices, a ransomware attack may cause a few extra headaches, but it won’t wipe the company out. Companies without those protections in place, however, risk allowing ransomware to bankrupt their entire enterprise.

United Structures of America, Inc. (“United Structures”), a Houston-based steel manufacture and design company, was worth $100,000,000 at the height of its business, but due to a ransomware attack in May 2019, the company has now filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas.

Unfortunately, the United Structures case is also one in which paying the ransom didn’t secure the restoration or return of United Structures’ data. The FBI has long advised that “[p]aying a ransom doesn’t guarantee you or your organization will get any data back.” The loss suffered by United Structures was so catastrophic that United Structure has been “methodically winding down its operations” ever since.  United Structures first announced its intention to shut down its Houston facility and lay off all 79 of its employees in 2019.

According to court filings, the May 2019 ransomware attack wiped out United Structure’s “data relating to accounts receivable, accounts payable, current orders, customer information, current CNC machinery files, along with essentially all of its business data.” Debtors in bankruptcy are ordinarily required to provide the kinds of financial data destroyed in the May 2019 ransomware attack in various forms with their bankruptcy petitions, to creditors upon request, and in their schedules of assets and liabilities, statements of financial affairs, and disclosure statements.  United Structures qualified to file under subchapter V of Chapter 11, so while it will still be required to file schedules and a statement of financial affairs, United Structures was able to avoid the petition-date filing requirements by submitting a statement under oath explaining its lack of financial information.

United Structures can also expect to benefit from subchapter V’s debtor-friendly plan confirmation process. As a debtor filing under subchapter V, United Structures can confirm a plan of liquidation without the approval of any creditors, who may be frustrated with the lack of information regarding United Structures’ finances. Additionally, United Structures may avoid the requirement of filing a disclosure statement, in which debtors are typically required to provide adequate information for creditors to make an informed decision about the debtor’s plan to exit bankruptcy. 

Victims of ransomware attacks considering bankruptcy who do not qualify for subchapter V protection are not without recourse under the Bankruptcy Code.  These companies may still file for Chapter 11 bankruptcy protection, but a company with no historical financial data attempting to comply with Chapter 11’s disclosure requirements would be navigating uncharted territory.  These debtors should expect the lack of historical financial data to increase the time, expense, and difficulty of a bankruptcy filing, as efforts to notify creditors of the filing and provide creditors with due process will still be required.

Recommendations:

Over the past few years, ransomware has become one of the most efficient attack types for hackers seeking profit as well as one of the most destructive on the target organizations. Encrypting business files until a ransom is paid can often result in a complete disruption of business operations, and that downtime can cause large-volume financial losses for some companies. Companies must become more proactive in ensuring that their disaster recovery procedures are able to handle such sophisticated attacks. Companies should consider the following:

  • To avoid enterprise-ending losses due to a ransomware attack, be proactive: implement industry best-practice data security measures, data protection policies, employee data security training, and data backup procedures.

  • Policies specific to ransomware should be prepared in advance of a ransomware attack, bearing in mind that paying ransom does not guarantee that data will be restored or returned.

  • If a catastrophic ransomware attack occurs before industry best-practice procedures can be implemented, consider whether  your business qualifies for subchapter V protection under the bankruptcy code, which could provide a relatively low-cost path to liquidation and dissolution.

In the immediate wake of a ransomware attack, companies should reach out to trusted outside counsel and forensic vendors. But taking proactive steps to ensure that your company is prepared for a ransomware attack is always best-practice. As the United Structures case demonstrates, failing to prepare for a ransomware attack can be a fatal and costly mistake. 

© 2022 Bracewell LLPNational Law Review, Volume XII, Number 21
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About this Author

Philip Bezanson, white collar criminal defense, securities, attorney, Bracewell
Managing Partner, Seattle

Philip J. Bezanson's practice focuses on white collar criminal defense, internal investigations, securities enforcement and regulatory matters.

Mr. Bezanson is a member of the Bracewell & Giuliani LLP team that has represented corporate and individual clients in recent high-profile and complex cases, including the Deepwater Horizon explosion, the George Washington Bridge lane closure and General Motors ignition switch investigations, "Pay to Play" cases in New York, New Mexico and Illinois, the stock options backdating cases, and a variety...

212-508-6138
Jason Cohen, Bracewell, corporate financial restructuring attorney, secured creditors lawyer, bankruptcy litigation,
Partner

Jason Cohen’s practice focuses on corporate financial restructuring.  Over the last 10 years, Mr. Cohen has represented corporate debtors and senior and junior secured creditors in all phases of corporate debt restructurings, including negotiating out-of-court workouts and litigating in-court chapter 11 bankruptcy cases with assets ranging from $20mm to over $1bln.  In such capacity Mr. Cohen has often advised parties on debt and equity financing as well as asset sales.   Prior to joining Bracewell, Mr. Cohen served as a law clerk to the Honorable Marvin Isgur of the U.S...

713-221-1416
Caroline E. Ellis Attorney SEC Joint Ventures Bracewell Law Firm Houston
Associate

Caroline Ellis’ practice focuses primarily on joint ventures, general corporate transactions, and public and private capital markets transactions. In addition, she advises clients on Securities and Exchange Commission (SEC) reporting and disclosure obligations and other corporate governance and compliance matters.

Prior to joining Bracewell, Caroline interned in the Aviation & Admiralty Litigation Section of the Department of Justice, Civil Division, Torts Branch, as well as a pro bono intern with Atlanta Legal Aid.

713-221-1370
Brittney Justice Litigation Attorney Bracewell
Associate

Brittney Justice represents clients across a range of industries in litigation and government enforcement and investigations in federal and state courts. She provides advice on diverse matters, including securities litigation, complex commercial disputes, environmental claims and government investigations. 

Prior to joining Bracewell, Brittney was a legal intern with Texas’ First Court of Appeals.

202.828.1744
Claire Cahoon Litigation Attorney Bracewell Law Firm
Associate

Claire Cahoon focuses her practice on complex commercial litigation and appeals. Prior to joining Bracewell, Claire served as a legal extern in the United States Attorney’s Office for the Northern District of Texas.

Education

Southern Methodist University Dedman School of Law, J.D.

2020 - magna cum laude

University of Southern California, B.A.

2016 - magna cum laude

Bar Admissions

Texas

Languages

Spanish — proficient

713.221.1428
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