Miller Barondess Files Lawsuit Against Owners of Ruby’s Diner, Inc. for Self Dealing, Fraudulent Transfers, and Breaches of Fiduciary Duty

March 11, 2021 06:57 PM Pacific Standard Time

LOS ANGELES–(BUSINESS WIRE)–The Complaint, filed in federal court in the Central District of California, alleges that Defendants Douglas Cavanaugh and Ralph Kosmides, owners and former officers of Ruby’s Diner, Inc. (“RDI”), drove RDI into bankruptcy after improperly taking assets from RDI and its affiliates. The lawsuit—brought by RDI’s Chapter 7 Trustee, Richard Marshack—seeks $35+ million in damages.

Per the Complaint, RDI owned and operated the iconic Ruby’s Diner restaurant chain. Cavanaugh and Kosmides founded the chain in Southern California in 1982, and it grew to include over 40 locations. The company declared bankruptcy in 2018 when it owed $14+ million to its creditors.

According to the lawsuit, RDI’s insolvency was due to a series of decisions by which Cavanaugh and Kosmides improperly enriched themselves at the expense of the company. It is alleged that Cavanaugh and Kosmides used Ruby’s name, expertise, funds and personnel to obtain a lucrative opportunity from the State of California to develop two highly successful restaurants in Crystal Cove State Park: The Beachcomber and The Shake Shack. It is further alleged that once the opportunity was obtained, Cavanaugh and Kosmides put the restaurants into other entities they personally owned, depriving RDI of significant assets to which it was entitled.

Cavanaugh and Kosmides allegedly used RDI resources to prop up the two Crystal Cove restaurants and other businesses they owned, paying insurance premiums, wages, and other expenses for these other businesses with RDI funds, and even purportedly used RDI personnel to perform work for these other businesses. Per the lawsuit, this meant that Cavanaugh and Kosmides could reap greater profits from their other businesses.

The Complaint also alleges that Cavanaugh and Kosmides granted themselves loans totaling more than one and a half million dollars, which sat on the books of RDI for years; and that Cavanaugh and Kosmides allegedly engaged in improper conduct when, two months before they put RDI into bankruptcy, they purported to re-characterize these loans as distributions to avoid having to repay them.

In addition to seeking compensatory damages, the lawsuit also requests treble and punitive damages, attorneys’ fees, and the imposition of constructive trusts that would allow RDI to assert control over the restaurants and other assets that Cavanaugh and Kosmides supposedly diverted from RDI.

Plaintiff is represented by Skip Miller of Miller Barondess, LLP in Los Angeles.

Richard A. Marshack, Chapter 7 Trustee v. Douglas Cavanaugh, et al., U.S. Bankruptcy Court, Central District of California, Case No. 8:18-bk-13311-SC