When the Operating Agreement No Longer Matches Reality

In Tennessee LLC disputes, one of the earliest control problems is not always open conflict. Often it is drift. The written operating agreement says one thing, but the business starts operating another way. Over time, that mismatch can affect ownership status, authority, compensation practices, records, and later proof. The Tennessee Court of Appeals decisions discussed below show why that drift matters before a dispute hardens.

This article is intentionally narrow. It is about Tennessee LLC disputes and closely held business control problems involving LLCs. The authorities cited here are LLC-focused and should not be generalized to corporations, partnerships, or other entity forms without separate research.

A common warning sign is ownership story drift. In Heatherly v. Off The Wagon Tours, LLC, the dispute over records access became a dispute over whether the plaintiff was a member at all, and then whether he remained a current member or had become only a former member. The court explained that LLC documents may suggest membership status, but they are not conclusive, and that the parties' conduct before and after formation is also relevant evidence. That makes a practical point for Tennessee LLCs: when the ownership story later depends on reconstructed explanations rather than a clean documentary record, the dispute becomes harder to unwind.

The same case also shows why current-member versus former-member status matters. Under the Tennessee Revised Limited Liability Company Act, the court noted that both members and former members can have access rights to LLC records, but former members' rights are narrower and limited to proper purposes tied to the periods during which they were members. In other words, status is not just a label. It can affect what rights are still in play and how the dispute gets framed.

Another red flag is undocumented authority change. In Regions Bank v. BRIC Constructors, LLC, the operating agreement stated that the LLC was member-managed and that liability could be incurred by the members or by agents or employees expressly authorized by the members. The Court of Appeals also discussed ratification, explaining that ratification depends on full knowledge of the material facts plus conduct indicating adoption of the unauthorized act. In practical terms, when an LLC begins acting as though someone has authority that the documents do not clearly give them, later disputes often turn into fact-intensive arguments about express authority, implied authority, or ratification by later conduct.

A different mismatch appears when capital contributions and governance on paper no longer match lived practice. In Meadows v. Story, the Court of Appeals noted that the operating agreement reflected fifty-percent membership interests, equal governance rights, and equal capital contributions. But the relationship later devolved into serious conflict over withdrawals and business control. The opinion does not stand for the idea that every written contribution entry or governance allocation controls every later dispute automatically. It does show that once the operating agreement and the real operating history diverge, later proof gets more difficult.

The mismatch can become even sharper when compensation, distributions, and company payments stop matching the documents. In Kelly v. Stewart, the Court of Appeals left intact the trial court's merits finding that the operating agreement was a valid and binding contract and that the manager breached it by paying himself in excess of his commissions without the required approval. In Grubb v. Grubb, the Court of Appeals separately emphasized that salary and distribution are distinct concepts under the LLC Act and rejected an attempt to treat salary as though it were a distribution after the fact. Together, those cases support a narrow but useful warning sign: when an LLC starts treating salary, management fees, owner draws, commissions, and distributions as though they are interchangeable, later disputes become materially harder.

Another warning sign is the business's reliance on side understandings and 'that's just how we've always done it' explanations. In Grubb, the Court of Appeals rejected an alleged equal-compensation agreement where the supposed arrangement was described as 'unspoken' and 'just the way it's been.' The court held that this did not establish a contract or a sufficient meeting of the minds. That does not answer every question about every informal arrangement in every LLC. But it does support a practical lesson: when important business terms exist mostly as assumptions or habits instead of clearly provable agreement, the mismatch between documents and reality becomes far harder to prove later.

Books and records often become the next battleground once the agreement no longer matches reality. In Kelly, the Court of Appeals left intact merits findings that the defendant breached duties relating to access to records and maintaining the company's books and records, while vacating and remanding damages and attorney's-fee issues for clarity. And in Heatherly, the access dispute was directly tied to the member-status dispute. Those cases support a narrow, practical point: when the paperwork, financial records, and access controls do not align with the story the LLC is telling, the governance problem is usually getting worse, not better.

The same is true of the idea that an accounting will sort it out later. In Meadows, the Court of Appeals said that an accounting request is left to the trial court's discretion and that an accounting is unnecessary where a party has access to or the ability to access the financial records. That means accounting should not be treated as an assumed cleanup device for every internal LLC mismatch. When the company's conduct has already drifted away from the written agreement, the quality of the records and the quality of the proof matter early.

The broader business lesson from these Tennessee LLC cases is straightforward: once the operating agreement no longer matches reality, later disputes usually become harder because the fight is no longer just about what the document says. It becomes a fight about status, authority, payments, course of conduct, ratification, and records. The longer the mismatch continues without clear documentary alignment, the more room there is for competing stories about what the LLC really agreed to or how it really operated.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific LLC, operating agreement, or control dispute.

A practical next step is a focused review of the operating agreement, ownership records, payment history, and company books with Tennessee counsel so the mismatch can be evaluated in the correct frame: status, authority, compensation, records, or some combination of them.