Ruby's Diner founders are hit with a lawsuit over 2018 bankruptcy filing

The trustee of the Chapter 7 proceedings alleges that Doug Cavanaugh and Ralph Kosmides snatched a development opportunity that should have been Ruby's.
Photograph: Shutterstock

The trustee overseeing Ruby's Diner’s Chapter 7 bankruptcy proceedings has filed a lawsuit that accuses the chain’s co-founders and longtime leaders, Doug Cavanaugh and Ralph Kosmides, of pushing the chain into insolvency in their pursuit of a personal business opportunity.

The suit seeks $35 million in damages over a situation that extends back years. The action pivots on how Cavanaugh and Kosmides represented themselves and their business affiliations when the pair were pursuing a contract to replace a foodservice operation in a California-owned recreational facility.  

The pair agreed to scrap the antiquated operation within Crystal Cove State Park for two restaurants they would personally own and operate, including a unit of Shake Shack.

Bankruptcy court trustee Richard Marshack alleges that the opportunity should have been pursued as an initiative of Ruby’s Diner. His suit accuses Cavanaugh and Kosmides of leveraging Ruby’s reputation and assets to land the state contract. He also charges that Ruby’s personnel were used to get the operations up and operating.

In addition to damages, the suit seeks a transfer of the Crystal Cove restaurants to a trust that Ruby’s would control.

Marshack also accuses the longtime partners of granting themselves loans from Ruby’s totaling more than $1.5 million. His suit asserts that the loans sat on Ruby’s books for years, and were ultimately reclassified by the borrowers as a disbursement rather than an IOU.  

Cavanaugh and Kosmides could not be reached for comment.

As a result of their actions, the suit contends, Ruby’s was forced in 2018 to file for bankruptcy protection. The company, which had grown by that point to 32 locations, had about $14 million in debt, according to Marshak's attorneys.

A franchisee, Stephen Craig, stepped forward at that time to provide a cash infusion. Cavanaugh remained CEO of the company he’d founded with Kosmides in 1982. By that point, the pair’s stake in their brainchild had been purchased to settle years of squabbling over the Crystal Cove project.

Marshak, as trustee of the bankruptcy proceedings, is represented in the matter by the Los Angeles law firm Miller Barondess.

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