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BLOOMINGTON — A Bloomington business that helps fledgling entrepreneurs is facing a legal challenge from its former chief financial officer over claims of unpaid loans at the same time an affiliated business closed after a separate legal dispute.

A lawsuit filed by Scott Rathbun, both individually and as guardian for his son Franklin Rathbun, against Kahuna Business Holdings accuses the firm of failing to repay about $248,000 in loans. 

Rathbun, who served as Kahuna's CFO from 2004 to April 2017, is now senior budget manager for the city of Bloomington.

In addition to Rathbun's lawsuit, Kahuna Business Holdings and its president Frank Lunn are dealing with the closing of Acclaim Resource Partners, an insurance subrogation business that closed next door to Kahuna at 807 Arcadia Drive.

Kahuna Business Holdings, Lunn and Rathbun are among six owners of Acclaim, according to the Illinois Secretary of State. Lunn said he was not involved in the day-to-day operations of the business that assisted insurance companies with collections from at-fault drivers in accidents.

Rathbun's lawsuit against Kahuna, the limited liability corporation in which he retains a 10 percent ownership stake, accuses the firm of failing to pay the principal and interest for four loans he made to the company in 2013 and 2014. The civil action also names Ohana Legacy Development Corp, another Kahuna-related holding.

Lunn declined to comment on the pending lawsuit, but in a response filed in court by his lawyers, Kahuna claims the company lacks the funds to repay the money.

Kahuna denies it has defaulted on the notes, arguing that a February 2017 revision to the initial agreement lowered the interest rate to one percent and removed the prior due dates.

The lower interest rate was requested by Rathbun, according to Kahuna, after he realized the September 2015 agreement "would create undesirable income tax consequences for him."

Rathbun declined to comment on the lawsuit that lists Lunn as the majority owner of Kahuna, with Rathbun and Tammy Cook each holding a 10 percent share.

According to Lunn, the shuttering of Acclaim Resource Partners "is tied to what appeared to be an unwinnable situation with a vendor."

A legal dispute with a large insurance firm forced Acclaim to close its office that opened in 2005 and employed 15 people, said Lunn.

The closing has created problems for some small mutual insurance companies served by the business.

Pat Widolff, manager of Buckeye Mutual Insurance Co. in Orangeville, said he and other insurance companies recently received a notice about Acclaim from the Iowa firm handling their reinsurance claims.

"We were told they suddenly closed their doors, with no letter of warning," said Widolff, whose northern Illinois firm was working with the Bloomington company to recover losses for a client.     

Lunn acknowledged that recent developments for Kahuna Business Holdings, the company that started as a credit card service business in 1995 and transitioned to a business incubator, have resulted in "a little recalibration" for the company.

Earlier this year, Lunn was listed as one of three victims in criminal charges against the former manager of a hedge fund who stole more than $800,000 from investors. Derek Gordon was sentenced to five years in prison and ordered to pay about $625,000 to two investors.

Lunn said he did not ask for restitution as part of Gordon's plea agreement, noting that the loss of $200,000 was an expensive business lesson.

Kahuna currently has 14 employees and assists new companies with start-up resources. 

Follow Edith Brady-Lunny on Twitter: @pg_blunny

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McLean County Courts Reporter

McLean County courts reporter for The Pantagraph.