From nginx's error log:

/usr/lib/ruby/1.9.1/rubygems.rb:14: warning: already initialized constant VERSION
/usr/lib/ruby/1.9.1/rubygems.rb:14: warning: already initialized constant RubyGemsVersion
/usr/lib/ruby/1.9.1/rubygems.rb:194: warning: already initialized constant MUTEX
/usr/lib/ruby/1.9.1/rubygems.rb:196: warning: already initialized constant RubyGemsPackageVersion
/usr/lib/ruby/1.9.1/rubygems.rb:202: warning: already initialized constant WIN_PATTERNS
/usr/lib/ruby/1.9.1/rubygems.rb:1079: warning: already initialized constant MARSHAL_SPEC_DIR
/usr/lib/ruby/1.9.1/rubygems.rb:1084: warning: already initialized constant YAML_SPEC_DIR
/usr/lib/ruby/1.9.1/rubygems.rb:14: warning: already initialized constant VERSION
/usr/lib/ruby/1.9.1/rubygems.rb:14: warning: already initialized constant RubyGemsVersion
/usr/lib/ruby/1.9.1/rubygems.rb:194: warning: already initialized constant MUTEX
/usr/lib/ruby/1.9.1/rubygems.rb:196: warning: already initialized constant RubyGemsPackageVersion
/usr/lib/ruby/1.9.1/rubygems.rb:202: warning: already initialized constant WIN_PATTERNS
/usr/lib/ruby/1.9.1/rubygems.rb:1079: warning: already initialized constant MARSHAL_SPEC_DIR
/usr/lib/ruby/1.9.1/rubygems.rb:1084: warning: already initialized constant YAML_SPEC_DIR
/usr/lib/ruby/1.9.1/syck.rb:82:in `<module:Syck>': uninitialized constant Syck::DefaultResolver (NameError)
        from /usr/lib/ruby/1.9.1/syck.rb:80:in `<top (required)>'
        from /usr/lib/ruby/1.9.1/yaml/syck.rb:5:in `require'
        from /usr/lib/ruby/1.9.1/yaml/syck.rb:5:in `<top (required)>'
        from /usr/lib/ruby/1.9.1/yaml.rb:11:in `require'
        from /usr/lib/ruby/1.9.1/yaml.rb:11:in `<top (required)>'
        from /usr/lib/ruby/1.9.1/rubygems/config_file.rb:7:in `require'
        from /usr/lib/ruby/1.9.1/rubygems/config_file.rb:7:in `<top (required)>'
        from /usr/lib/ruby/1.9.1/rubygems.rb:1124:in `require'
        from /usr/lib/ruby/1.9.1/rubygems.rb:1124:in `<top (required)>'
        from /usr/lib/ruby/gems/1.9.1/gems/passenger-3.0.9/lib/phusion_passenger/utils.rb:25:in `require'
        from /usr/lib/ruby/gems/1.9.1/gems/passenger-3.0.9/lib/phusion_passenger/utils.rb:25:in `<top (required)>'
        from /usr/lib/ruby/gems/1.9.1/gems/passenger-3.0.9/helper-scripts/passenger-spawn-server:102:in `require'
        from /usr/lib/ruby/gems/1.9.1/gems/passenger-3.0.9/helper-scripts/passenger-spawn-server:102:in `rescue in <main>'
        from /usr/lib/ruby/gems/1.9.1/gems/passenger-3.0.9/helper-scripts/passenger-spawn-server:30:in `<main>'


That's the core that I need to figure and sort out.

Site config for nginx:

  passenger_enabled on;
  passenger_set_cgi_param HTTP_X_FORWARDED_FOR   $proxy_add_x_forwarded_for;
  passenger_set_cgi_param HTTP_X_REAL_IP         $remote_addr;
  passenger_set_cgi_param HTTP_HOST              $http_host;
  passenger_set_cgi_param HTTP_X_FORWARDED_PROTO $scheme;
  rails_env production;

The following repo is installed additional to the standard ubuntu lucid:

deb https://oss-binaries.phusionpassenger.com/apt/passenger lucid main