Can An Equitable Accounting Find The Missing Cash?

Allegations of missing cash are a familiar feature of business divorce litigation, particularly in restaurants and other cash-heavy businesses. When the books are incomplete and the money never made it into the bank, minority owners are often left with suspicion and frustration, but little concrete proof.

A recent decision from Manhattan Commercial Division Justice Jennifer Schecter (the same judge behind the keystone accounting case O'Mahony v Whiston [read here]), demonstrates how far an equitable accounting can go in those circumstances. Li v Satsuma underscores the accounting claim as an extraordinarily powerful tool for forcing fiduciaries to explain what the records show. But it also highlights the claim's shortcomings when alleged cash transactions never made it onto the books at all.

The Ramen Restaurants

Satsuma USA LLC is a New York LLC formed to operate Japanese ramen restaurants. The Company has four owners: three managing members and one non-managing member, Jeanette Li—the plaintiff here. A 2017 Operating Agreement governs the rights and obligations of the members.

The Company's operations are twofold: it runs a brick-and-mortar ramen restaurant in Brooklyn, and it runs a Manhattan kitchen facilitating its robust delivery and meal kit sales, selling across the country with platforms such as Uber Eats and Goldbelly.

The Misconduct Alleged

Plaintiff commenced suit in 2021 alleging that the three Managing Members refused to make the books and records available for her inspection, engaged in acts of self-dealing and misappropriation of company property, and diverted company opportunities to an unrelated entity.

At the complaint stage, the Plaintiff's allegations of misconduct were relatively thin, and they fell into three broad buckets:

Insider transactions and loans. Li alleged that the Managing Members wrongly caused Satsuma to make non-arm's length loans and payments to entities under their control.

Usurpation of company opportunities. Li alleged that the Managing Members created another entity, JForward Inc., then used Satsuma's kitchen and supplies in order to make and sell delivery and meal kits—sales that otherwise would have been Satsuma's.

Unreported and diverted cash. Li alleged that one of the Managing Members "improperly converted the LLC's physical assets such cash [sic] and cash equivalents in merchant accounts and otherwise."

The Accounting Order

By order dated February 28, 2022, Justice Schecter granted the Plaintiff summary judgment on her accounting claim, directing the Managing Members to "provide plaintiff with a complete accounting of the Company from its inception to date."

The Managing Members responded by submitting a tapestry of records, including internal accounting schedules, bank statements, payroll records, and tax filings. Obviously missing from those records were any unreported cash receipts and distributions. To the extent the Managing Members took payments in cash, Plaintiff alleged, those cash receipts never hit the books.

Plaintiff's Objections to the Accounting

With those records (incomplete as they were), Plaintiff crystallized her allegations of financial misconduct.

Through the report of her expert, Plaintiff concluded that the Managing Members schemed to cut her out of a profitable portion of the business by using the Company's location to sell delivery for JForward through Goldbelly, Uber Eats, and other services. Plaintiff supported that theory with her expert's calculation that the Company's cooking gas costs skyrocketed between 2018 and 2021—evidencing a substantial increase in food output—while reported sales remained stagnant.

Plaintiff also identified more than $250,000 in unexplained transfers and loans, including loans between Satsuma and JForward.

Finally, Plaintiff highlighted that according to the Company's records, the Company reported no cash revenues after 2020, despite reporting more than $17,000 in 2019 and $12,000 in 2020. While that's enough to trigger anyone's skepticism, Plaintiff's expert couldn't find a way to reasonably estimate the allegedly unreported cash. He instead argued that the Company's cash practices necessitated a "reasonable" additional 10% surcharge on the Company's reported sales.

The Court's Decision

What followed was a six-day bench trial over the adequacy of the accounting and the financial misconduct alleged.

The Court's post-trial decision, Li v Satsuma USA LLC, No. 527940/2021 (New York County 2026), treats us to a thorough analysis on what qualifies as an accounting and when a surcharge is appropriate. It reveals the strengths—and limitations—of the accounting claim's power to right the wrongs of unreported cash transactions.

What is an Accounting?

The Court first resolved whether the Managing Members could satisfy their duty to account by simply producing books and records.

Justice Schecter held—albeit in a "close call"—that the materials produced by the Managing Members were sufficient to constitute an accounting. While it is true that a fiduciary cannot carry his burden to account by simply throwing records at the complaining party, the Court observed, the records coupled with the lay-witness testimony of the Managing Members could, despite the less-than-ideal manner, "be considered as an accounting."

The Accounting's Burden-Shifting Framework Carries the Day

But the Managing Members' sloppy accounting brought serious risk: "The manifestation of that risk," said the Court, was "significant evidentiary gaps at trial that defendants were incapable of filling."

With the Managing Members having accounted, the burden shifted to Plaintiff to identify specific inaccuracies or omissions in the accounting warranting the imposition of a surcharge. Once Plaintiff did so, the burden would shift back to the Managing Members to explain the transactions at issue and why no surcharge was warranted.

The Insider Loans Surcharge. Plaintiff got her best results in forcing the Managing Members to account for their insider payments and loans. She identified more than $250,000 in unexplained payments or undocumented loans, including to JForward and other of the Managing Members' entities.

The Court skewered the Managing Members' attempts to avoid a surcharge by relying on the informal nature of these loans: "the relative informality with which this type of business was run on a day-to-day basis does not obviate the need to formally account in litigation." It did the same to the Managing Members' naked citations to the Company's general ledger as evidence of repayment: "Merely listing such a balance on an accounting without any clear backup or compelling testimony to support it is insufficient to carry defendants' burden to account for the Companies' money"

The Usurpation Surcharge. Relying on her expert's gas-use analysis, the Plaintiff sought a surcharge of 50% of the Company's expenses, reasoning that 50% of those expenses actually went toward profits for JForward.

Skeptical of the Plaintiff's gas-use calculations, the Court found no evidentiary basis for any such surcharge.

The Unreported Cash Surcharge. The Court agreed that a surcharge was warranted for certain specific cash receipts, crediting trial testimony that the Managing Members could not account for those receipts.

But as to a surcharge for cash sales that never hit the books, the Court rejected Plaintiff's proposed 10%-on-revenue surcharge as arbitrary and unsupported by any reliable forensic methodology. Absent competent proof of the magnitude of the unreported cash sales, the surcharge was limited to the specific transactions for which the Managing Members could not account. So despite highlighting the absurdity of a restaurant reporting zero cash sales, Plaintiff couldn't make a convincing case for recovery of cash that never hit the books.

The Accounting Claim Works, Mostly

In one case, Satsuma shows both the extraordinary strength—and the fundamental limitations—of an accounting proceeding.

On the strength side, the accounting claim allowed a plaintiff who began the case with relatively thin allegations and almost no access to information to force the Managing Members to explain every recorded transaction. And when those explanations fell short, the Court held them financially accountable. The Court made no allowances for the Managing Members' historically informal recordkeeping practices and rejected after-the-fact efforts to paper over missing funds.

The accounting claim also carried an important practical benefit. Citing BCL 626, the Court held that the Plaintiff was entitled to recover her reasonable attorneys' fees incurred in prosecuting the accounting and securing a derivative recovery on behalf of the Company.

At the same time, it is easy to see why the Plaintiff might feel shorted by the result. To the extent cash transactions never actually hit the books, the accounting claim left her in a difficult position. The Court was plainly reluctant to surcharge fiduciaries for transactions that may never have been recorded in the first place—at least absent competent proof of their magnitude.

That's not to say an accounting claim can never uncover off-the-books cash. But at a minimum, Satsuma reinforces the need for a strong forensic expert and a defensible methodology. Had the gas-usage or off-the-books cash analyses been better developed, the outcome here might have looked different. But without a way to reliably quantify the off-the-books cash, even the powerful accounting claim can come up short.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.