Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc

Main Document Page 1 of 13

1 William N. Lobel (CA Bar No. 93202)

PACHULSKI STANG ZIEHL & JONES LLP
2 650 Town Center Drive, Suite 1500
Costa Mesa, CA 92626
3 Telephone: (714) 384-4740
Facsimile: (714) 384-4741
4 E-mail: [email protected]

5 [Proposed] Attorneys for Ruby’s Diner, Inc., a California

corporation, Debtor and Debtor-in-Possession
6

8 UNITED STATES BANKRUPTCY COURT

9 CENTRAL DISTRICT OF CALIFORNIA

10 SANTA ANA DIVISION

11 In re: Case Nos.: 8:18-bk-13197-CB; 8:18-bk-

13198-CB; 8:18-bk-13199-CB; 8:18-bk-
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 RUBY’S SOCAL DINERS, LLC, 13200-CB; 8:18-bk-13201-CB; 8:18-bk-

a Delaware limited liability company, et al.,1 13202-CB;
COSTA MESA, CALIFORNIA

13
ATTORNEYS AT LAW

Debtors and Debtors-in Possession, Chapter 11

14
Affects: DECLARATION OF DOUGLAS S.
15 CAVANAUGH IN SUPPORT OF
All Debtors EMERGENCY FIRST DAY MOTIONS
16
RUBY’S SOCAL DINERS, LLC, ONLY
17
RUBY’S QUALITY DINERS, LLC, ONLY Date: August 31, 2018
18 Time: 10:00 a.m.
Place: Courtroom 5D
19 RUBY’S HUNTINGTON BEACH, LTD., ONLY 411 West Fourth Street
Santa Ana, CA 92701
20 RUBY’S LAGUNA HILLS, LTD. ONLY
21
RUBY’S OCEANSIDE, LTD., ONLY
22
RUBY’S PALM SPRINGS, LTD., ONLY
23

24

25

26

27
1
The last four digits of the Debtors’ federal tax identification numbers are as follows: Ruby’s SoCal Diners, LLC
28 (9782); Ruby’s Quality Diners, LLC (1539); Ruby’s Huntington Beach, Ltd. (1331); Ruby’s Laguna Hills, Ltd. (6603);
Ruby’s Oceanside, Ltd. (9104); and Ruby Palm Springs, Ltd. (9627).

DOCS_LA:316123.6 76135/001
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 2 of 13

1 I, Douglas S. Cavanaugh, hereby declare that the following is true and correct to the best of

2 my knowledge, information and belief:

3 1. I am a founder and the Chief Executive Officer (“CEO”) of Ruby’s Diners, Inc., a

4 California corporation (“RDI”) and am president of, the above-captioned debtors and debtors-in-

5 possession (“Debtors”). I have served in the capacity of CEO since the incorporation of RDI in

6 1985. I am also a 60% shareholder of RDI.

7 2. I submit this declaration (the “Declaration”) in support of the Debtors’ chapter 11

8 petitions and “first day” motions and applications described further below (collectively, the “First

9 Day Motions”).2 Except as otherwise indicated, all statements in this Declaration are based upon my

10 review of the Debtors’ books and records, relevant documents and other information prepared or

11 collected by RDI’s employees, or my opinion based on my experience with the Debtors’ operations
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 and financial condition. In making my statements based on my review of the Debtors’ books and
COSTA MESA, CALIFORNIA

13 records, relevant documents and other information prepared or collected by the Debtors’ employees,
ATTORNEYS AT LAW

14 I have relied upon these employees accurately recording, preparing or collecting any such

15 documentation and other information. If I were called to testify as a witness in this matter, I could

16 and would competently testify to each of the facts set forth herein based upon my review of

17 documents, information provided to me by RDI’s employees or my opinion. I am authorized to

18 submit this Declaration on behalf of the Debtors’.

19 3. Based on my review of the Debtors’ books, records and other information, I believe

20 that the relief sought by the Debtors in the First Day Motions is necessary to enable the Debtors to

21 continue to operate as a Debtors in Possession during the course of their chapter 11 cases, to

22 minimize the disruption attendant with a chapter 11 filing and to maximize the value of the Debtors’

23 estates for the benefit of their creditors and parties in interest.

24 4. Part I of this Declaration describes the business of the Debtor, RDI and its affiliates

25 and the developments that led to the Debtors’ filing for relief under chapter 11 of title 11 of the

26

27

28
2
Capitalized terms not defined herein have the meanings ascribed to them in the First Day Motions, as applicable.

-2-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 3 of 13

1 United States Code (the “Bankruptcy Code”). Part II of this Declaration sets forth the relevant facts

2 in support of the First Day Motions filed concurrently herewith in support of this case.

3 I.

4 PART I

5 A. Overview of the RDI, Debtors and their Business Operations

6 5. RDI was incorporated on February 13, 1985. Its principal business address is 4100

7 MacArthur Blvd., Suite 310, Newport Beach, California 92660. RDI owns varying percentages of

8 and operates diners in Southern California through its subsidiaries, including through its wholly-

9 owned subsidiary, Ruby’s SoCal Diners, LLC, a Delaware limited liability company (“SoCal

10 Diners”). RDI and its affiliates (referred to from time to time herein as the “Company”) own,

11 operate and manage restaurants under the trade names “Ruby’s®,” “Ruby’s® Diner,” “The Ruby
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 Restaurant Group,” “Ruby’s® Dinette” and “Ruby’s® Shake Shop.” The Company has operated
COSTA MESA, CALIFORNIA

13 Ruby’s® restaurants since its incorporation and is known as a purveyor of very popular burgers, fries
ATTORNEYS AT LAW

14 and shakes. RDI is owned 60% by me and 40% by Ralph Kosmides, and we are the founders of the

15 Company (the “Company Founders”). RDI is the owner of the Ruby’s® trademarks, system and

16 intellectual property (the “Marks and Intellectual Property”) and is the employer of the Company’s

17 more than 800 employees.

18 B. The Debtor and Its Affiliates’ Corporate Structure3

19 6. RDI is the 100% owner and sole and managing member of SoCal Diners. SoCal

20 Diners is the 100% owner and sole and managing member of Ruby’s Quality Diners LLC

21 (“Quality”). SoCal Diners is the general partner and 50% owner, and Quality is the limited partner

22 and 50% owner, of the following California limited partnerships: (1) Ruby’s Huntington Beach,

23 Ltd., which owns and operates a Ruby’s® restaurant on the pier in Huntington Beach, California;

24 (2) Ruby’s Oceanside, Ltd., which owns and operates a Ruby’s® restaurant in Oceanside, California;

25 (3) Ruby’s Palm Springs, Ltd., which owns and operates a Ruby’s® restaurant in Palm Springs,

26

27
3
A chart depicting the Company’s corporate structure is attached hereto as Exhibit “1.”
28

-3-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 4 of 13

1 California; (4) Ruby’s Mission Valley, Ltd., which until a few months prior to the Petition Date,

2 owned and operated a Ruby’s® restaurant in the Westfield Mission Valley Mall in San Diego,

3 California;4 and (5) Ruby’s Laguna Hills, Ltd., which owns and operates a Ruby’s® restaurant in the

4 Laguna Hill Mall in Laguna Hills, California5 (collectively, the “SoCal Entities” and the restaurants

5 owned by the SoCal Entities, the “SoCal Restaurants”).

6 7. Each of the Ruby’s restaurants is owned by an individual single purpose entity.

7 8. In addition, as of the Petition Date, RDI holds ownership interests in, and

8 management roles in connection with, the following joint venture entities: (1) RDI is the managing

9 member and 70% owner of Ruby’s Beach Ventures LLC, which owns and operates a Ruby’s®

10 restaurant in Long Beach, California;6 (2) RDI is the general partner and 50% owner of Ruby’s

11 Diner South Coast Plaza LP, which owns and operates a Ruby’s® restaurant at South Coast Plaza
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 Mall in Costa Mesa, California;7 (3) RDI is the managing member and sole owner of Ruby’s
COSTA MESA, CALIFORNIA

13 Woodbridge LLC, which owns and operates a Ruby’s® restaurant in Woodbridge in Irvine,
ATTORNEYS AT LAW

14 California; and (4) RDI is the managing member and 50% owner of Ruby’s Spectrum LLC, which

15 until a few months prior to the Petition Date, owned and operated a Ruby’s® restaurant at the Irvine

16 Spectrum in Irvine, California8 (collectively, the “RDI Entities” and the restaurants owned by the

17 RDI Entities, the “RDI Restaurants”). The RDI Restaurants, together with the SoCal Restaurants,

18 are referred to as the “Company Restaurants”).

19

20

21
4
The Mission Valley restaurant was closed prior to the Petition Date, in April 2018.
22
5
RDI anticipates that, due to significant, continuing construction projects underway at the Laguna Hills Mall, the Laguna
23 Hills restaurant may close following the Petition Date.

24 6
The other 30% of Ruby’s Beach Ventures LLC is held by various third-party investors.

25 7
The other 50% of Ruby’s Diner South Coast Plaza LP is owned by South Coast Plaza, a California general partnership,
as the limited partner.
26
8
The other 50% of Ruby’s Spectrum LLC is held by William C. Taormina, Trustee of the Taormina Revocable Inter
27 Vivos Trust u/d/t dated July 26, 1983 (“Taormina”). The Irvine Spectrum restaurant was closed prior to the Petition
Date, in April 2018.
28

-4-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 5 of 13

1 9. As of the Petition Date, there also were twenty-four (24) Ruby’s® Diner franchises (or

2 licensed units) located in Southern California, Arizona, Pennsylvania, New Jersey, Nevada and

3 Texas that were owned and, with certain limited exceptions, operated by independent third parties.9

4 Ruby’s Franchise Systems, Inc., a California corporation (“RFS”), an entity affiliated with the

5 Debtor through common ownership and control, currently serves as the franchisor to the Ruby’s®

6 franchisees/licensees (the “Franchisees”), and licenses the Marks and Intellectual Property from RDI

7 as licensor. Under RFS’ agreements with the Franchisees (the “Franchise Agreements”), RFS (as

8 franchisor) is entitled to a franchise royalty fee, which is generally the greater of a set dollar amount

9 or four percent (4%) of “Gross Sales” (as such term is defined in the Franchise Agreements). The

10 Franchise Royalty Fees historically average approximately $2.4 million per annum. As licensor of

11 the Marks and Intellectual Property to RFS, pursuant to an Amended and Restated Trademark and
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 Intellectual Property License Agreement, dated June 1, 1990 (the “RDI/RFS License Agreement”),
COSTA MESA, CALIFORNIA

13 RDI is entitled to one percent (1%) of the “Gross Sales” generated by RFS and the Franchisees as a
ATTORNEYS AT LAW

14 license fee, which fees have historically averaged approximately $600,000 per annum (the “RDI

15 License Fee”).

16 10. The Debtors are solvent and it is anticipated that the allowed claims of all of the

17 creditor of the Debtors will be paid in full.

18 11. The filings by the Debtors are the result of a pending motion of Opus Bank, a secured

19 creditor of the Debtors, for the appointment of a receiver with respect to each of the Debtors.

20 12. The Debtors anticipate being able to function on a profitable basis during their

21 chapter 11 cases, with the exception of the restaurant located in the Laguna Hills Mall in Laguna

22 Hills, California (which is temporarily operating on a negative cash basis while the owners of the

23 Laguna Hills Mall complete a substantial renovation and reconstruction of the mall).

24

25
9
RFS (as defined herein), an affiliate of the Debtor owned 60% by me and 40% by Mr. Kosmides, the founders of the
26 Company, provides management services to two (2) Ruby’s® franchises located in Yorba Linda and Orange, California
(Ruby’s Yorba Linda, Ltd. and Ruby’s Orange Depot, LLC). Ruby’s Management, LLC (“RMLLC”) (an entity owned
27 by myself, Mr. Kosmides and Douglas Salisbury), provides management services for a Ruby’s® restaurant located in
Morongo, California (Ruby’s Morongo) and has sub-contracted with the Debtor for those services. RMLLC owns 50%
28 of Shake Shack, LLC (the other 50% is owned by three unrelated parties), which operates the Shake Shack in Laguna
Beach, California. The Debtor does not provide management services in connection with the Shake Shack.

-5-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 6 of 13

1 13. Ultimately, the Defendants believe they will be able to confirm chapter 11 plans that

2 will pay the allowed claims of their creditors in full.

3 14. In the various First Day Motions, the Debtors seek relief on an expedited basis that

4 will help them restructure their business, maximize the value of their estates and permit them to

5 conduct their chapter 11 cases efficiently and economically.

6 II.

7 PART II

8 A. First Day Motions and Applications

9 1. In order to enable the Debtors to minimize the adverse effects of the commencement

10 of their cases and maximize its restructuring opportunity, the Debtors have requested various types

11 of relief in the First Day Motions filed concurrently with this Declaration. A summary of the relief
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 sought in each First Day Motion is set forth below.

COSTA MESA, CALIFORNIA

13 2. I have reviewed each of these First Day Motions (including the exhibits and
ATTORNEYS AT LAW

14 schedules thereto). The facts stated therein are true and correct to the best of my knowledge,

15 information and belief, and I believe that the type of relief sought in each of the First Day Motions:

16 (a) is necessary to enable the Debtors to operate in chapter 11 with minimal disruption to their

17 current business operations; and (b) is essential to maximizing the value of the Debtors’ business for

18 the benefit of their estates and creditors.

19 B. Motion of Debtors for an Order Under Federal Rules of Bankruptcy Procedure 2002(i),
2002(m), 4001, 6004, 6006, 6007, 9006, 9007, 9013, 9014, and 9019, authorizing the
20 Debtor to Limit Notice of Limited Notice Matters
21 The Debtors seek an order authorizing the Debtors to limit notice of the Limited Notice

22 Matters, as defined in the Motion (the “Limited Notice Motion”) in this chapter 11 case (the “Case”)

23 to the following parties: (1) the Office of the United States Trustee, (2) the creditors appearing on the

24 list filed in accordance with Fed. R. Bankr. P. 1007(d) by the Debtors unless and until an official

25 committee of unsecured creditors (the “Committee”) is appointed, then in that event, to counsel to

26 the Committee, (3) parties that file with the Court and serve upon the Debtors request for notice of

27 all matters in accordance with Bankruptcy Rule 2002(i), (4) the United States of America, (5) the

28 State of California, (6) any party with a pecuniary interest in the subject matter of the particular

-6-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 7 of 13

1 Limited Notice Matter or its counsel, (7) any other known secured creditors, and (8) counsel to the

2 Debtor’s postpetition lender.

3 There are approximately 1,500 parties on the mailing matrix. The Debtors do not have fax

4 numbers or email addresses for many of these parties. Serving the Motion by telephone, messenger

5 or personal delivery on each of the parties would clearly be cost and time prohibitive, if not

6 impossible.

7 If the relief requested herein is granted, the burden, complication, delay and cost to the

8 Debtors estates that is associated with administering the Case and providing notice of the

9 proceedings in this Case to hundreds of parties would be dramatically reduced.

10 Accordingly, I believe that the relief requested in the Limited Notice Motion is both

11 necessary and in the best interest of the Debtors estate and their creditors.
P ACHULSKI S TANG Z IEHL & J ONES LLP

12
C. Motion of Debtor for an Order Under U.S.C. §§ 105, 363, 1107, and 1108 Authorizing,
COSTA MESA, CALIFORNIA

13 but not Obligating the Debtor to Honor its Prepetition Obligations Under Certain
ATTORNEYS AT LAW

Customer-Related Programs and to Maintain and Administer Certain Programs in the

14 Ordinary Course of Business and in a Manner Consistent with Past Practice in the
Debtor’s Discretion
15
The Debtors seek an order authorizing, but not obligating, the Debtors to honor their
16
prepetition obligations under certain customer-related programs (collectively, the “Customer
17
Programs”) and to maintain and administer certain programs in the ordinary courts of business and
18
in a manner consistent with past practice in the Debtors’ discretion as described in the Motion (the
19
“Customer Programs Motion”).
20
Specifically, the Customer Programs generally relate to the Debtors’ programs in which they
21
offer gift cards, exchanges, and other promotional offers to their customers. The Customer
22
Programs are designed to allow the Debtors and the restaurants to successfully compete in a highly
23
competitive marketplace by ensuring customer satisfaction and generating loyalty and goodwill,
24
thereby allowing the Debtors and the restaurants to retain current customers, attract new ones, and
25
ultimately enhance revenue and profitability.
26
Honoring these Gift Cards is essential to the Debtors’ business operations so that customer
27
confidence and satisfaction is maintained – which in turn, maximizes their ability to successfully
28

-7-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 8 of 13

1 reorganize for the benefit of all parties in interest. A failure to continue to honor the Debtors’

2 prepetition obligations in connection with the Gift Cards would result in deterioration in

3 relationships with the Debtors’ customers and significantly harm the Debtors’ standing in their

4 competitive restaurant business, thereby causing a material reduction in sales and jeopardizing the

5 Debtors’ ability to reorganize thier business.

6 Accordingly, I believe that the relief requested in the Customer Programs Motion is both

7 necessary and in the best interest of the Debtors’ estate and their creditors.

8
D. Motion of Debtor for an Order Under 11 U.S.C. §§ 363, 101-1530, as amended, and
9 Rule 4001(b) Federal Rules of Bankruptcy Procedure Authorizing (1) Interim Use of
Cash Collateral; and (2) Granting Adequate Protection for Use of Prepetition
10 Collateral
11 The Debtors seek the entry of interim order authorizing the Debtors to use cash collateral
P ACHULSKI S TANG Z IEHL & J ONES LLP

12 and granting related relief requested in the Motion (the “Cash Collateral Motion”). By the Cash
COSTA MESA, CALIFORNIA

13 Collateral Motion, the Debtors seek an order (1) approving the use of cash collateral on an
ATTORNEYS AT LAW

14 emergency interim basis, subject to their budgets attached to the Cash Collateral Motion as Exhibit

15 “A” (the “Budgets”) and pending a final hearing, in such amounts necessary to enable the Debtors

16 to operate their businesses and avoid immediate and irreparable harm; (2) granting adequate

17 protection to their secured creditors with an interest in cash collateral (defined herein as the

18 “Secured Creditors”) on an interim basis; and (3) scheduling and establishing deadlines regarding a

19 final hearing on the Debtors’ use of cash collateral.

20 In order to address their working capital needs and fund their reorganization efforts, the

21 Debtors require the use of the Cash Collateral of certain secured creditors in accordance with their

22 Budgets on an interim basis through the final hearing on this Motion, and on a final basis through

23 November 25, 2018. The use of Cash Collateral will provide the Debtors with the necessary funding

24 with which to operate their businesses, maximize value – including the value of the secured

25 creditors’ existing collateral – and pursue implementation of chapter 11 plans of reorganization. The

26 essential terms of the Debtors’ proposed cash collateral use are as follows:

27  The Cash Collateral Motion does not request approval of any of the provisions set
forth in the currently filed Statement Regarding Cash Collateral or Debtor in
28

-8-
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 9 of 13

1 Possession Financing filed in accordance with Local Bankruptcy Rule 4001-2(a) (the
“Statement”).
2
 The Motion seeks authorization to use cash currently on hand in the estate and funds
3
generated from the operation of the Debtors’ business pursuant to the Budget
4 appended to the Cash Collateral Motion as Exhibit “A” on an interim basis through
the final hearing on the Cash Collateral Motion, and thereafter on a final basis
5 through December 31, 2018.
6
The Cash Collateral Motion proposes to grant to (1) Opus Bank, (2) C & C Partnership and
7
(3) Pillsbury Winthrop Shaw Pittman LLP adequate protection for the use of their collateral.
8
The Debtor’s continued operation, including the necessity of paying payroll and the other
9
necessary and appropriate expenses set forth in the Budget, will adequately protect the Secured
10
Creditors as the Debtor will continue to generate revenue and preserve its business. In addition, the
11
Secured Creditors are adequately protected by the proposed replacement liens to the extent of any
P ACHULSKI S TANG Z IEHL & J ONES LLP

12
diminution that have the same extent, validity, scope, and priority as the prepetition liens held by the
COSTA MESA, CALIFORNIA

13
ATTORNEYS AT LAW

respective Secured Creditors.

14
In anticipation of this chapter 11 case, the Debtor developed cashflow projections reflecting
15
anticipated revenue and expenditures through the first 13 weeks of the case, contained in the Budget,
16
provided that the Debtors’ seek authority to exceed 15 percent 15%) of the aggregate of the weekly
17
expenditures reflected on the Budget, measured on a four-week rolling basis. The Budget sets forth
18
the amount of cash necessary for the Debtors to operate their business postpetition. The Budget
19
takes into account the effect this bankruptcy filing may have on the Debtors’ business and the
20
expenses of the administration of this chapter 11 case.
21
As set forth in the Budget, the Debtors seek authority to use cash on hand as of the Petition
22
Date and funds generated from operation of their businesses in accordance with the budget.
23

24

25

26

27

28

-9-
Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 10 of 13
Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 11 of 13

EXHIBIT “1”
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 12 of 13

Ruby's Diner Inc.
As sole, and managing member, owns 
100%
As Managing Member, owns 50% "A"; 
as  Investor, owns 20% "B"

As General Partner, owns 50%
Ruby's SoCal Diners LLC               
As sole, and managing member, owns 
As Managing Member, owns 50%
Ruby's Quality Diners LLC             100%
Ruby's Beach 
As Limited Partner, owns 50% As General Partner, owns 50% As sole member, owns 100%
Ventures LLC 

Ruby's Diner 
South Coast Plaza 
Ruby's HB LTD

Ruby's Spectrum 
Ruby's OS LTD
LLC

Ruby's PS LTD
Ruby's 
Woodbridge LLC
Ruby's MVC LTD

Ruby's LH LTD

EXHIBIT "1"
Page 11
 Case 8:18-bk-13197-CB Doc 20 Filed 08/30/18 Entered 08/30/18 14:10:41 Desc
Main Document Page 13 of 13

Ruby's Retail 
Ruby's Franchise Systems Inc. Ruby's Management LLC Brands
Related Party  Contributing Member,  Retail Products 
Franchises owns 50% Licensor

Management Contract
24 Independent Ruby's 
Franchise/Licensed 
Units
Ruby's Yorba  Shake Shack LLC, 
under Beachcomber 
Linda LTD Management Crystal 

Ruby's Pasadena 
Ruby's Morongo
LTD ‐ Now sold

Ruby's Orange 
Depot LLC

EXHIBIT "1"
Page 12