Operating Agreement Mistakes: Avoid Future Disputes in Your Missouri LLC

Insights from Missouri Case Law

An LLC operating agreement is often treated as a formality — a document members sign once at formation and rarely revisit. But Missouri appellate courts have repeatedly been asked to fill in the gaps left by poorly drafted operating agreements, and the results are rarely favorable to the party who assumed the silence would go their way. Four Missouri Court of Appeals decisions illustrate how ambiguity, silence, and boilerplate language in founding documents can produce years of expensive litigation. At The Carrington Firm, we use these cases as a roadmap for the provisions our corporate clients cannot afford to leave to chance.

1. Silence Is Not Neutral: What Happens When an Operating Agreement Doesn't Say What You Think It Says

In Chadwick v. Huntoon, 634 S.W.3d 832 (Mo. App. 2021), three members formed an LLC in the home remodeling business. The operating agreement allowed expulsion of a member "with or without cause," and specified that a member expelled without cause would receive $1,000 per week for twelve weeks. The remaining members assumed that was the end of their financial obligation. It wasn't. The Missouri Court of Appeals held that because the operating agreement never addressed what happened to the expelled member's underlying "member's interest" — his right to share in profits, losses, and distributions — the statutory default terms of Missouri's LLC Act filled the void. As the court explained, when a contract is silent, the analysis defaults to the statute:

Except as otherwise provided in the operating agreement, upon the withdrawal of a member, the withdrawn member shall have no further right to participate in the management and affairs" of the company but "shall have only the rights of an assignee of the withdrawn member's interest.

Because the drafters never included language stating that the twelve payments were made in lieu of the member's distributional interest, or that the interest was forfeited or transferred upon expulsion, the court refused to read that intent into the contract. The result: the remaining members were held liable for the expelled member's ongoing distribution rights, a share of the company's buy-out value, and even punitive damages and attorney's fees tied to a breach of fiduciary duty.

The lesson for drafters: An expulsion clause that only addresses how much and how long a departing member will be paid is incomplete. It must also expressly state what happens to that member's residual economic interest — whether it is extinguished, purchased, or transferred — and it must do so in unambiguous terms. The court was explicit that it would not "supply additional terms" to a contract that is otherwise clear, and it will not infer a forfeiture the parties never wrote down.

The Carrington Firm approach: We draft expulsion and withdrawal provisions that address both tracks of a member's rights — participation rights and distribution/economic rights — separately and expressly, so that a payment schedule cannot later be reinterpreted as compensation for an interest the agreement never mentioned. We also build in valuation methodologies up front, so that clients are not left arguing over "fair value" years after the fact, in litigation, with only conflicting lay testimony to support a number.

2. Protecting What You Actually Own: Nonsolicitation Clauses and Third-Party Beneficiary Language

JTL Consulting, L.L.C. v. Shanahan, 190 S.W.3d 389 (Mo. App. 2006), arose from a business structure common in professional services: a consulting entity (JTL) whose members worked as producers for an insurance brokerage (Lockton). When a JTL member left and began soliciting Lockton's customers, both JTL and Lockton sued to enforce nonsolicitation covenants in the operating and consulting agreements. Both plaintiffs lost.

The court's reasoning turned on a fundamental drafting failure: the covenant was written to protect "Customer Accounts," but the underlying agreements never established that JTL itself owned any protectable interest in those accounts. As the court noted, a party seeking to enforce a noncompete must first demonstrate a stock of customers who regularly deal with it:

before an employer can claim a protectable interest in customer contacts, an employer must first have a stock of customers who regularly deal with the employer, and unless the proponent has a trade following, there can be no protectable interest.

Because the customers belonged to Lockton, not JTL, JTL could not enforce the covenant against its own departing member — even though JTL's entire revenue model depended on those customer relationships.

Compounding the problem, Lockton — the entity that actually possessed the protectable interest — could not enforce the covenant either, because the operating agreement contained a blanket disclaimer that "[n]one of the provisions contained in this Agreement shall be for the benefit of or enforceable by any third parties." The drafters never carved out an exception allowing Lockton, the very client the covenant was designed to protect, to enforce it directly.

The lesson for drafters: A restrictive covenant is only as strong as the ownership interest behind it, and a generic "no third-party beneficiaries" clause can inadvertently disarm the one party the covenant was written to protect. Drafting a nonsolicitation clause requires asking: who actually owns the customer relationship, and does the document give that owner standing to enforce the promise?

The Carrington Firm approach: When we draft restrictive covenants for multi-entity structures — holding companies, consulting arrangements, franchise-style relationships — we make sure the entity enforcing the covenant is the entity that actually holds the protectable interest, and we tailor third-party beneficiary language so that clients and their affiliated business partners are not accidentally excluded from enforcing the very protections built for their benefit.

3. Manager Authority: Closing the Gap Between "Actual" and "Apparent" Authority

Pitman Place Development, LLC v. Howard Investments, LLC, 330 S.W.3d 519 (Mo. App. 2010), is a cautionary tale about what happens when an operating agreement limits a manager's authority but the company fails to police that limitation in practice. Pitman's operating agreement capped its manager's authority to encumber company property at $50,000 without member consent. The manager, acting alone and fraudulently, altered the operating agreement to show a $750,000 cap, then used the falsified document to obtain a $525,000 loan secured by the company's only real estate asset.

Even though the manager plainly lacked actual authority, the court held the company bound anyway, because the lender reasonably relied on the manager's apparent authority:

Apparent authority" exists when a principal, either by its acts or representations, has led third persons to believe authority has been conferred upon an agent.

The court emphasized that Pitman itself, through its operating agreement, had "cloaked" the manager with the general appearance of authority to manage the company's affairs — including borrowing money and encumbering property — and that the fraud was made possible by the company's own founding document, not created by the manager alone. Missouri's LLC statute independently confirmed the outcome, since the loan was consistent with the company's stated business purpose of acquiring and encumbering real property.

The lesson for drafters: A dollar-threshold limitation on manager authority is a good start, but it is not self-enforcing. If the operating agreement broadly authorizes a manager to run the company's affairs — including borrowing and encumbering assets — third parties are entitled to rely on that general grant of authority unless they have actual notice of the specific limitation. A private restriction buried in Article 5 does nothing if outsiders never see it, or if the manager is able to alter or misrepresent it without detection.

The Carrington Firm approach: We advise clients to pair internal authority limitations with practical safeguards — dual-signature requirements for transactions above a threshold, member notification protocols for major financing decisions, and (where appropriate) recorded or filed restrictions that put third parties on constructive notice. An authority limit that exists only on paper, without a mechanism to prevent a single manager from acting unilaterally, is a limit in name only.

4. Fiduciary Duty Provisions Cut Both Ways

Hibbs v. Berger, 430 S.W.3d 296 (Mo. App. 2014), demonstrates that operating agreement provisions limiting fiduciary duties are enforceable — and can be either a shield or a sword depending on which side of the table you sit on. A minority, non-voting 5% member sued the LLC's manager and a majority member for breach of fiduciary duty after the business failed and he went unpaid on commissions. Missouri's LLC statute confirms that managers generally owe fiduciary duties to the company and, the court held for the first time, to individual members as well. But the statute also allows those duties to be reshaped by contract:

the member's, manager's or other person's duties and liabilities may be expanded or restricted by provision in the operating agreement.

Because Tavern Creek's operating agreement contained a limitation-of-liability clause protecting managers and members acting in good faith and within the scope of their authority — plus a specific carve-out shielding members who made loans to the company from any duty not to declare a default — the court held that the manager owed no enforceable fiduciary duty on the facts alleged, notwithstanding the statutory default. The same case also confirms, for the first time in Missouri, that a minority member is not categorically barred from piercing the corporate veil against majority owners — though the plaintiff still had to prove the same three-part control-and-injustice test as any other veil-piercing plaintiff, and failed to do so.

The lesson for drafters: Limitation-of-liability and duty-modification clauses are powerful tools under Missouri's LLC Act, but they must be drafted with precision about whose duties are limited, toward whom, and under what circumstances (e.g., good faith, within scope of authority, excluding fraud and gross negligence). Vague or overly broad limitation language invites litigation over its scope; narrowly tailored language invites certainty.

The Carrington Firm approach: We help clients decide, at formation, exactly how much fiduciary flexibility they want to build in — recognizing that lenders, controlling members, and managers often want broad protection for good-faith business judgment, while minority members want assurance that the duty to act fairly is not written away entirely. Getting this balance right at the outset avoids the multi-year fight over "was this duty modified, and by how much" that consumed the parties in Hibbs.

The Common Thread: Precision Prevents Litigation

Across all four cases, the disputes did not arise because Missouri law is unclear. They arose because the operating agreements were silent, ambiguous, or internally inconsistent on issues that were entirely foreseeable at the time of drafting:

• What happens to a member's economic interest upon expulsion or withdrawal?
• Who actually owns the customer relationships or business interests a restrictive covenant is meant to protect, and does that party have the right to enforce it?
• What real-world limits exist on a manager's authority to bind the company, and how are those limits communicated to and enforceable against third parties?
• To what extent are fiduciary duties expanded, limited, or eliminated — and for which relationships?

Courts consistently apply the same interpretive principle: when the operating agreement is silent, gaps are filled by Missouri's Limited Liability Company Act default rules — rules that may not reflect what the members actually intended. And when the agreement is ambiguous, courts will not rewrite it to supply the term a party wishes had been included.

How The Carrington Firm Helps Clients Get It Right the First Time

At The Carrington Firm, we treat the formation stage of a business — articles of organization, operating agreements, consulting agreements, member admission documents — as the most important risk-management work we do for a client, not a routine filing exercise. Drawing on the lessons of cases like Chadwick, JTL Consulting, Pitman Place, and Hibbs, our approach includes:

1. Expulsion and withdrawal provisions that separately address participation rights, economic/distribution rights, and valuation methodology, so a payment schedule can never be mistaken for a full buyout.
2. Restrictive covenants matched to the entity that actually owns the protected interest, with third-party beneficiary language calibrated to include — not accidentally exclude — the parties meant to benefit.
3. Manager authority provisions paired with practical, enforceable mechanisms (dual approval, notice requirements, recorded restrictions) rather than dollar limits that exist only on paper.
4. Fiduciary duty and limitation-of-liability clauses drafted with precision about scope, good-faith standards, and carve-outs, calibrated to each client's actual risk tolerance and relationship to the company.
5. Regular review and updating of operating agreements as a business grows, adds members, or changes its capital structure — because the agreement that worked for three founding members rarely fits the same company five years and several members later.

The cost of precise drafting today is a fraction of the cost of the litigation these four companies endured. If your business is forming a new LLC, adding members, or simply hasn't reviewed its operating agreement in several years, contact The Carrington Firm to schedule a review. Preventing a dispute is always less expensive than winning one.

Illustration: How The Carrington Firm Helps Clients Get It Right the First Time

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This article is provided for informational purposes only and does not constitute legal advice. The outcome of any legal matter depends on its specific facts and circumstances. Contact The Carrington Firm to discuss your business's specific needs.