Passenger ignores RailsEnv directive for Rails 3 applications

You might find that your Passenger ignores all RailsSomething directives in the vhost for your new Rails 3 application. The culprit is a file config.ru which makes Passenger consider your application a Rack (non-Rails) application.

To fix this you can either use RackEnv in lieu of RailsEnv (it works fine) or delete the config.ru. Unless you have a good reason to do so, go with RackEnv.