Trustee Sues Co-Founders of Ruby's Diner Inc. in Bankruptcy Court

SANTA ANA (CNS) - The trustee overseeing Ruby's Diner Inc.'s Chapter 7 proceedings is suing the chain's co-founders and former officers in Santa Ana, alleging the pair drove the restaurant group into bankruptcy after improperly taking the company's assets and seeking at least $35 million in damages.

The complaint, filed Thursday in federal bankruptcy court by trustee Richard Marshack, alleges the chain's insolvency was caused by Douglas Cavanaugh and Ralph Kosmides due to a series of improper decisions.

An RDI representative could not immediately be reached for comment after regular business hours.

According to the suit, RDI owned and operated the Ruby's Diner restaurant chain, which Cavanaugh and Kosmides started in Newport Beach in 1982 and grew to include over 40 locations. The company declared bankruptcy in 2018 when it owed over $14 million to its creditors, the suit says.

The lawsuit alleges RDI's insolvency was due to a series of decisions by which Cavanaugh and Kosmides improperly enriched themselves at the expense of the company. Marshack claims that the co-founders 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.

The suit further alleges 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 using RDI personnel to staff them.

The complaint also alleges that the pair granted themselves loans totaling more than $1.5 million, which sat on the books of RDI for years, and that Cavanaugh and Kosmides engaged in improper conduct when, two months before they put RDI into bankruptcy, they purported to re-characterize the 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 allegedly diverted from RDI.

Photo: Getty Images

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