diff --git a/scripts/regenerate-claude-md.ts b/scripts/regenerate-claude-md.ts
index b032d65f..8bddd71d 100644
--- a/scripts/regenerate-claude-md.ts
+++ b/scripts/regenerate-claude-md.ts
@@ -43,8 +43,10 @@ interface ObservationRow {
   discovery_tokens: number | null;
 }
 
-// Import shared formatting utilities
+// Import shared utilities
 import { formatTime, groupByDate } from '../src/shared/timeline-formatting.js';
+import { isDirectChild } from '../src/shared/path-utils.js';
+import { replaceTaggedContent } from '../src/utils/claude-md-utils.js';
 
 // Type icon map (matches ModeManager)
 const TYPE_ICONS: Record<string, string> = {
@@ -135,19 +137,6 @@ function walkDirectoriesWithIgnore(dir: string, folders: Set<string>, depth: num
   }
 }
 
-/**
- * Check if a file is a direct child of a folder (not in a subfolder)
- * @param filePath - File path like "src/services/foo.ts"
- * @param folderPath - Folder path like "src/services"
- * @returns true if file is directly in folder, false if in a subfolder
- */
-function isDirectChild(filePath: string, folderPath: string): boolean {
-  if (!filePath.startsWith(folderPath + '/')) return false;
-  const remainder = filePath.slice(folderPath.length + 1);
-  // If remainder contains a slash, it's in a subfolder
-  return !remainder.includes('/');
-}
-
 /**
  * Check if an observation has any files that are direct children of the folder
  */
@@ -288,37 +277,27 @@ function formatObservationsForClaudeMd(observations: ObservationRow[], folderPat
 
 /**
  * Write CLAUDE.md file with tagged content preservation
+ * Note: For the CLI regenerate tool, we DO create directories since the user
+ * explicitly requested regeneration. This differs from the runtime behavior
+ * which only writes to existing folders.
  */
-function writeClaudeMdToFolder(folderPath: string, newContent: string): void {
+function writeClaudeMdToFolderForRegenerate(folderPath: string, newContent: string): void {
   const claudeMdPath = path.join(folderPath, 'CLAUDE.md');
   const tempFile = `${claudeMdPath}.tmp`;
 
+  // For regenerate CLI, we create the folder if needed
   mkdirSync(folderPath, { recursive: true });
 
+  // Read existing content if file exists
   let existingContent = '';
   if (existsSync(claudeMdPath)) {
     existingContent = readFileSync(claudeMdPath, 'utf-8');
   }
 
-  const startTag = '<claude-mem-context>';
-  const endTag = '</claude-mem-context>';
-
-  let finalContent: string;
-  if (!existingContent) {
-    finalContent = `${startTag}\n${newContent}\n${endTag}`;
-  } else {
-    const startIdx = existingContent.indexOf(startTag);
-    const endIdx = existingContent.indexOf(endTag);
-
-    if (startIdx !== -1 && endIdx !== -1) {
-      finalContent = existingContent.substring(0, startIdx) +
-        `${startTag}\n${newContent}\n${endTag}` +
-        existingContent.substring(endIdx + endTag.length);
-    } else {
-      finalContent = existingContent + `\n\n${startTag}\n${newContent}\n${endTag}`;
-    }
-  }
+  // Use shared utility to preserve user content outside tags
+  const finalContent = replaceTaggedContent(existingContent, newContent);
 
+  // Atomic write: temp file + rename
   writeFileSync(tempFile, finalContent);
   renameSync(tempFile, claudeMdPath);
 }
@@ -450,7 +429,7 @@ function regenerateFolder(
 
     // Format using relative path for display, write to absolute path
     const formatted = formatObservationsForClaudeMd(observations, relativeFolder);
-    writeClaudeMdToFolder(absoluteFolder, formatted);
+    writeClaudeMdToFolderForRegenerate(absoluteFolder, formatted);
 
     return { success: true, observationCount: observations.length };
   } catch (error) {
diff --git a/src/services/sqlite/SessionSearch.ts b/src/services/sqlite/SessionSearch.ts
index 4c78845c..9b21ff54 100644
--- a/src/services/sqlite/SessionSearch.ts
+++ b/src/services/sqlite/SessionSearch.ts
@@ -2,6 +2,7 @@ import { Database } from 'bun:sqlite';
 import { TableNameRow } from '../../types/database.js';
 import { DATA_DIR, DB_PATH, ensureDir } from '../../shared/paths.js';
 import { logger } from '../../utils/logger.js';
+import { isDirectChild } from '../../shared/path-utils.js';
 import {
   ObservationSearchResult,
   SessionSummarySearchResult,
@@ -336,15 +337,6 @@ export class SessionSearch {
     return this.db.prepare(sql).all(...params) as ObservationSearchResult[];
   }
 
-  /**
-   * Check if a file is a direct child of a folder (not in a subfolder)
-   */
-  private isDirectChild(filePath: string, folderPath: string): boolean {
-    if (!filePath.startsWith(folderPath + '/')) return false;
-    const remainder = filePath.slice(folderPath.length + 1);
-    return !remainder.includes('/');
-  }
-
   /**
    * Check if an observation has any files that are direct children of the folder
    */
@@ -354,7 +346,7 @@ export class SessionSearch {
       try {
         const files = JSON.parse(filesJson);
         if (Array.isArray(files)) {
-          return files.some(f => this.isDirectChild(f, folderPath));
+          return files.some(f => isDirectChild(f, folderPath));
         }
       } catch {}
       return false;
@@ -372,7 +364,7 @@ export class SessionSearch {
       try {
         const files = JSON.parse(filesJson);
         if (Array.isArray(files)) {
-          return files.some(f => this.isDirectChild(f, folderPath));
+          return files.some(f => isDirectChild(f, folderPath));
         }
       } catch {}
       return false;
diff --git a/src/shared/path-utils.ts b/src/shared/path-utils.ts
new file mode 100644
index 00000000..ff04fe5c
--- /dev/null
+++ b/src/shared/path-utils.ts
@@ -0,0 +1,82 @@
+/**
+ * Shared path utilities for CLAUDE.md file generation
+ *
+ * These utilities handle path normalization and matching, particularly
+ * for comparing absolute and relative paths in folder CLAUDE.md generation.
+ *
+ * @see Issue #794 - Path format mismatch causes folder CLAUDE.md files to show "No recent activity"
+ */
+
+/**
+ * Normalize path separators to forward slashes, collapse consecutive slashes,
+ * and remove trailing slashes.
+ *
+ * @example
+ * normalizePath('app\\api\\router.py') // 'app/api/router.py'
+ * normalizePath('app//api///router.py') // 'app/api/router.py'
+ * normalizePath('app/api/') // 'app/api'
+ */
+export function normalizePath(p: string): string {
+  return p.replace(/\\/g, '/').replace(/\/+/g, '/').replace(/\/+$/, '');
+}
+
+/**
+ * Check if a file is a direct child of a folder (not in a subfolder).
+ *
+ * Handles path format mismatches where folderPath may be absolute but
+ * filePath is stored as relative in the database.
+ *
+ * NOTE: This uses suffix matching which assumes both paths are relative to
+ * the same project root. It may produce false positives if used across
+ * different project roots, but this is mitigated by project-scoped queries.
+ *
+ * @param filePath - Path to the file (e.g., "app/api/router.py" or "/Users/x/project/app/api/router.py")
+ * @param folderPath - Path to the folder (e.g., "app/api" or "/Users/x/project/app/api")
+ * @returns true if file is directly in folder, false if in a subfolder or different folder
+ *
+ * @example
+ * // Same format (both relative)
+ * isDirectChild('app/api/router.py', 'app/api') // true
+ * isDirectChild('app/api/v1/router.py', 'app/api') // false (in subfolder)
+ *
+ * @example
+ * // Mixed format (absolute folder, relative file) - fixes #794
+ * isDirectChild('app/api/router.py', '/Users/dev/project/app/api') // true
+ */
+export function isDirectChild(filePath: string, folderPath: string): boolean {
+  const normFile = normalizePath(filePath);
+  const normFolder = normalizePath(folderPath);
+
+  // Strategy 1: Direct prefix match (both paths in same format)
+  if (normFile.startsWith(normFolder + '/')) {
+    const remainder = normFile.slice(normFolder.length + 1);
+    return !remainder.includes('/');
+  }
+
+  // Strategy 2: Handle absolute folderPath with relative filePath
+  // e.g., folderPath="/Users/x/project/app/api" and filePath="app/api/router.py"
+  const folderSegments = normFolder.split('/');
+  const fileSegments = normFile.split('/');
+
+  if (fileSegments.length < 2) return false; // Need at least folder/file
+
+  const fileDir = fileSegments.slice(0, -1).join('/'); // Directory part of file
+  const fileName = fileSegments[fileSegments.length - 1]; // Actual filename
+
+  // Check if folder path ends with the file's directory path
+  if (normFolder.endsWith('/' + fileDir) || normFolder === fileDir) {
+    // File is a direct child (no additional subdirectories)
+    return !fileName.includes('/');
+  }
+
+  // Check if file's directory is contained at the end of folder path
+  // by progressively checking suffixes
+  for (let i = 0; i < folderSegments.length; i++) {
+    const folderSuffix = folderSegments.slice(i).join('/');
+    if (folderSuffix === fileDir) {
+      return true;
+    }
+  }
+
+  return false;
+}
diff --git a/src/utils/claude-md-utils.ts b/src/utils/claude-md-utils.ts
index a312127c..a60f5a84 100644
--- a/src/utils/claude-md-utils.ts
+++ b/src/utils/claude-md-utils.ts
@@ -6,7 +6,7 @@
  * <claude-mem-context> tags.
  */
 
-import { existsSync, readFileSync, writeFileSync, renameSync, mkdirSync } from 'fs';
+import { existsSync, readFileSync, writeFileSync, renameSync } from 'fs';
 import path from 'path';
 import os from 'os';
 import { logger } from './logger.js';
@@ -86,17 +86,22 @@ export function replaceTaggedContent(existingContent: string, newContent: string
 
 /**
  * Write CLAUDE.md file to folder with atomic writes.
- * Creates directory structure if needed.
+ * Only writes to existing folders; skips non-existent paths to prevent
+ * creating spurious directory structures from malformed paths.
  *
- * @param folderPath - Absolute path to the folder
+ * @param folderPath - Absolute path to the folder (must already exist)
  * @param newContent - Content to write inside tags
  */
 export function writeClaudeMdToFolder(folderPath: string, newContent: string): void {
   const claudeMdPath = path.join(folderPath, 'CLAUDE.md');
   const tempFile = `${claudeMdPath}.tmp`;
 
-  // Ensure directory exists
-  mkdirSync(folderPath, { recursive: true });
+  // Only write to folders that already exist - never create new directories
+  // This prevents creating spurious folder structures from malformed paths
+  if (!existsSync(folderPath)) {
+    logger.debug('FOLDER_INDEX', 'Skipping non-existent folder', { folderPath });
+    return;
+  }
 
   // Read existing content if file exists
   let existingContent = '';
@@ -321,7 +326,7 @@ export async function updateFolderClaudeMdFiles(
 
       const formatted = formatTimelineForClaudeMd(result.content[0].text);
 
-      // Fix for #758: Don't create new CLAUDE.md files if there's no activity
+      // Fix for #794: Don't create new CLAUDE.md files if there's no activity
       // But update existing ones to show "No recent activity" if they already exist
       const claudeMdPath = path.join(folderPath, 'CLAUDE.md');
       const hasNoActivity = formatted.includes('*No recent activity*');
diff --git a/tests/services/sqlite/session-search-path-matching.test.ts b/tests/services/sqlite/session-search-path-matching.test.ts
new file mode 100644
index 00000000..9f40fa2f
--- /dev/null
+++ b/tests/services/sqlite/session-search-path-matching.test.ts
@@ -0,0 +1,124 @@
+import { describe, expect, test } from 'bun:test';
+import { isDirectChild, normalizePath } from '../../../src/shared/path-utils.js';
+
+/**
+ * Tests for path matching logic, specifically the isDirectChild() algorithm
+ * Covers fix for issue #794: Path format mismatch causes folder CLAUDE.md files to show "No recent activity"
+ *
+ * These tests validate the shared path-utils module which is used by:
+ * - SessionSearch.ts (runtime folder CLAUDE.md generation)
+ * - regenerate-claude-md.ts (CLI regeneration tool)
+ */
+
+describe('isDirectChild path matching', () => {
+  describe('same path format', () => {
+    test('returns true for direct child with relative paths', () => {
+      expect(isDirectChild('app/api/router.py', 'app/api')).toBe(true);
+    });
+
+    test('returns true for direct child with absolute paths', () => {
+      expect(isDirectChild('/Users/dev/project/app/api/router.py', '/Users/dev/project/app/api')).toBe(true);
+    });
+
+    test('returns false for files in subdirectory with relative paths', () => {
+      expect(isDirectChild('app/api/v1/router.py', 'app/api')).toBe(false);
+    });
+
+    test('returns false for files in subdirectory with absolute paths', () => {
+      expect(isDirectChild('/Users/dev/project/app/api/v1/router.py', '/Users/dev/project/app/api')).toBe(false);
+    });
+
+    test('returns false for unrelated paths', () => {
+      expect(isDirectChild('lib/utils/helper.py', 'app/api')).toBe(false);
+    });
+  });
+
+  describe('mixed path formats (absolute folder, relative file) - fixes #794', () => {
+    test('returns true when absolute folder ends with relative file directory', () => {
+      // This is the exact bug case from #794
+      expect(isDirectChild('app/api/router.py', '/Users/dev/project/app/api')).toBe(true);
+    });
+
+    test('returns true for deeply nested folder match', () => {
+      expect(isDirectChild('src/components/Button.tsx', '/home/user/project/src/components')).toBe(true);
+    });
+
+    test('returns false for files in subdirectory of matched folder', () => {
+      expect(isDirectChild('app/api/v1/router.py', '/Users/dev/project/app/api')).toBe(false);
+    });
+
+    test('returns false when file path does not match folder suffix', () => {
+      expect(isDirectChild('lib/api/router.py', '/Users/dev/project/app/api')).toBe(false);
+    });
+  });
+
+  describe('path normalization', () => {
+    test('handles Windows backslash paths', () => {
+      expect(isDirectChild('app\\api\\router.py', 'app\\api')).toBe(true);
+    });
+
+    test('handles mixed slashes', () => {
+      expect(isDirectChild('app/api\\router.py', 'app\\api')).toBe(true);
+    });
+
+    test('handles trailing slashes on folder path', () => {
+      expect(isDirectChild('app/api/router.py', 'app/api/')).toBe(true);
+    });
+
+    test('handles double slashes (path normalization bug)', () => {
+      expect(isDirectChild('app//api/router.py', 'app/api')).toBe(true);
+    });
+
+    test('collapses multiple consecutive slashes', () => {
+      expect(isDirectChild('app///api///router.py', 'app//api//')).toBe(true);
+    });
+  });
+
+  describe('edge cases', () => {
+    test('returns false for single segment file path', () => {
+      expect(isDirectChild('router.py', '/Users/dev/project/app/api')).toBe(false);
+    });
+
+    test('returns false for empty paths', () => {
+      expect(isDirectChild('', 'app/api')).toBe(false);
+      expect(isDirectChild('app/api/router.py', '')).toBe(false);
+    });
+
+    test('handles root-level folders', () => {
+      expect(isDirectChild('src/file.ts', '/project/src')).toBe(true);
+    });
+
+    test('prevents false positive from partial segment match', () => {
+      // "api" folder should not match "api-v2" folder
+      expect(isDirectChild('app/api-v2/router.py', '/Users/dev/project/app/api')).toBe(false);
+    });
+
+    test('handles similar folder names correctly', () => {
+      // "components" should not match "components-old"
+      expect(isDirectChild('src/components-old/Button.tsx', '/project/src/components')).toBe(false);
+    });
+  });
+});
+
+describe('normalizePath', () => {
+  test('converts backslashes to forward slashes', () => {
+    expect(normalizePath('app\\api\\router.py')).toBe('app/api/router.py');
+  });
+
+  test('collapses consecutive slashes', () => {
+    expect(normalizePath('app//api///router.py')).toBe('app/api/router.py');
+  });
+
+  test('removes trailing slashes', () => {
+    expect(normalizePath('app/api/')).toBe('app/api');
+    expect(normalizePath('app/api///')).toBe('app/api');
+  });
+
+  test('handles Windows UNC paths', () => {
+    expect(normalizePath('\\\\server\\share\\file.txt')).toBe('/server/share/file.txt');
+  });
+
+  test('preserves leading slash for absolute paths', () => {
+    expect(normalizePath('/Users/dev/project')).toBe('/Users/dev/project');
+  });
+});
diff --git a/tests/utils/claude-md-utils.test.ts b/tests/utils/claude-md-utils.test.ts
index 44d1c02f..31726a24 100644
--- a/tests/utils/claude-md-utils.test.ts
+++ b/tests/utils/claude-md-utils.test.ts
@@ -147,8 +147,22 @@ describe('formatTimelineForClaudeMd', () => {
 });
 
 describe('writeClaudeMdToFolder', () => {
-  it('should create CLAUDE.md in new folder', () => {
-    const folderPath = join(tempDir, 'new-folder');
+  it('should skip non-existent folders (fix for spurious directory creation)', () => {
+    const folderPath = join(tempDir, 'non-existent-folder');
+    const content = '# Recent Activity\n\nTest content';
+
+    // Should not throw, should silently skip
+    writeClaudeMdToFolder(folderPath, content);
+
+    // Folder and CLAUDE.md should NOT be created
+    expect(existsSync(folderPath)).toBe(false);
+    const claudeMdPath = join(folderPath, 'CLAUDE.md');
+    expect(existsSync(claudeMdPath)).toBe(false);
+  });
+
+  it('should create CLAUDE.md in existing folder', () => {
+    const folderPath = join(tempDir, 'existing-folder');
+    mkdirSync(folderPath, { recursive: true });
     const content = '# Recent Activity\n\nTest content';
 
     writeClaudeMdToFolder(folderPath, content);
@@ -180,20 +194,22 @@ describe('writeClaudeMdToFolder', () => {
     expect(fileContent).not.toContain('Old content');
   });
 
-  it('should create nested directories', () => {
+  it('should not create nested directories (fix for spurious directory creation)', () => {
     const folderPath = join(tempDir, 'deep', 'nested', 'folder');
     const content = 'Nested content';
 
+    // Should not throw, should silently skip
     writeClaudeMdToFolder(folderPath, content);
 
+    // Nested directories should NOT be created
     const claudeMdPath = join(folderPath, 'CLAUDE.md');
-    expect(existsSync(claudeMdPath)).toBe(true);
-    expect(existsSync(join(tempDir, 'deep'))).toBe(true);
-    expect(existsSync(join(tempDir, 'deep', 'nested'))).toBe(true);
+    expect(existsSync(claudeMdPath)).toBe(false);
+    expect(existsSync(join(tempDir, 'deep'))).toBe(false);
   });
 
   it('should not leave .tmp file after write (atomic write)', () => {
     const folderPath = join(tempDir, 'atomic-test');
+    mkdirSync(folderPath, { recursive: true });
     const content = 'Atomic write test';
 
     writeClaudeMdToFolder(folderPath, content);
@@ -218,6 +234,7 @@ describe('updateFolderClaudeMdFiles', () => {
 
   it('should fetch timeline and write CLAUDE.md', async () => {
     const folderPath = join(tempDir, 'api-test');
+    mkdirSync(folderPath, { recursive: true }); // Folder must exist - we no longer create directories
     const filePath = join(folderPath, 'test.ts');
 
     const apiResponse = {
@@ -412,6 +429,7 @@ describe('updateFolderClaudeMdFiles', () => {
 
   it('should write CLAUDE.md to resolved projectRoot path', async () => {
     const subfolderPath = join(tempDir, 'project-root-write-test', 'src', 'utils');
+    mkdirSync(subfolderPath, { recursive: true }); // Folder must exist - we no longer create directories
 
     const apiResponse = {
       content: [{