BANGOR – A settlement that was reached to end a landfill dispute between Great Northern Paper Inc. and its parent company, Inexcon Maine, is falling apart, threatening the $103 million sale of the papermaker to Brascan Corp. of Toronto.

A federal bankruptcy judge’s signature was all that was needed to formalize the settlement, and that was expected to take place on Monday, with the sale to happen a week later on April 21. But on Friday, Katahdin Federal Credit Union in Millinocket, which is owed $3.2 million in mortgages on the landfill and other properties, filed documents in U.S. Bankruptcy Court in Bangor to contest the formula for how it would be paid back the money.

In the documents, Katahdin Federal states that it should be paid in full right away and not after a court hearing that will decide how much the properties are worth and whether Katahdin will be paid all or part of the $3.2 million. That court hearing is tentatively planned for three months from now.

The successful resolution of the landfill dispute is a mandatory condition that Brascan has placed in its $103 million sales agreement. If the landfill and other properties are not returned to Great Northern from Inexcon by April 21, a court-set date to wrap up the sale of Great Northern’s two mills, then the deal is off.

Jacob Manheimer, a Portland attorney for Brascan, reiterated the condition Friday.

“Since Day 1, everyone has known that as a condition of the sale, the land and other properties would have to be transferred free and clear of any liens,” Manheimer said.

If the landfill dispute isn’t concluded on Monday, he said that Brascan “will seriously have to consider whether or not to close the sale.”

Great Northern’s attorneys have promised, in writing, that they could deliver the landfill and other properties at the heart of the dispute to complete the deal with Brascan. On March 11, the attorneys for Great Northern’s new management team filed a 10-count lawsuit in federal bankruptcy court against Inexcon Maine and its owner, Lambert Bedard, for refusing to return the properties, which have a combined tax valuation of more than $5 million.

In the lawsuit, Inexcon Maine and Bedard, which are not in bankruptcy, were accused by Great Northern’s new management team of transferring the properties from Great Northern to themselves in a fraudulent manner. The landfill is used to dispose of waste products from the papermaking process at Great Northern.

Among the properties transferred to Inexcon Maine in 2001 were Great Northern’s “guest house” the Dolby landfill in East Millinocket, wood chipping scales at the entrance of the Golden Road in Millinocket, Hillcrest Golf Course in Millinocket, and an airport hangar in Millinocket.

According to the lawsuit, Great Northern’s board of directors voted to transfer ownership of the properties to Inexcon Maine and Bedard in June 2001. At the time, Bedard was chief financial officer of Great Northern and a member of the board of directors. He left those positions in early February.

The lawsuit stated that the properties were to be used by Inexcon Maine and Bedard as collateral to secure loans in their names for use by Great Northern.

At least six loans were obtained at Katahdin Federal Credit Union in Millinocket, and three of them were paid in full. Of the three outstanding loans, two totaling $2.35 million were written in Bedard’s name and the third, for $700,000, was written out to Inexcon Maine.

Although it was identified in the lawsuit, Katahdin Federal Credit Union was not named as a party to the suit until March 28. In the meantime, attorneys for Great Northern, Bedard and Inexcon Maine had already known for two days that they would have to prepare for a trial on April 14 and 15 to settle part of Great Northern’s lawsuit, according to Katahdin’s court documents.

On April 3, Great Northern’s attorneys and an attorney for Inexcon Maine told Bankruptcy Judge Louis Kornreich that they had reached an “agreement in principle” to dispose of the lawsuit. The verbal agreement was put into writing and filed in federal bankruptcy court on April 7, and Kornreich was expected to review it and sign it on Monday.

But the agreement did not list how much Katahdin Federal Credit Union would be paid on the estimated $3.2 million it is owed. According to terms of the deal, Boeing Capital Corp., the primary lender of funds to Great Northern, would place $3.4 million into an escrow account to pay an undetermined amount to the credit union.

In three or four months, Great Northern and Katahdin Federal would return to federal bankruptcy court to assess the valuation of all of the properties transferred to Great Northern, according to the agreement. If the assessment was less than $3.2 million, then only the assessed value would be paid. If the assessment was more, only a cap of $3.2 million would be paid.

Dan Cummings, a Portland attorney for Katahdin Federal Credit Union, said the agreement does not address Katahdin’s “important property rights.”

“First and foremost, Katahdin asserts that in order for GNP to convey any of the transferred property free and clear of Katahdin’s mortgages, Katahdin must be paid in full as required by [bankruptcy law],” Cummings wrote. “GNP, however, apparently intends to convey the sale property free and clear of Katahdin’s mortgages without necessarily paying Katahdin’s mortgages in full.”

In the court document, Cummings stated that Katahdin Federal Credit Union is “owned by its members, who are residents of the Millinocket area.” He said it is regulated by the National Credit Union Administration, “and the default of the outstanding loans has been a very serious problem for a credit union of Katahdin’s size and has drawn exacting scrutiny from NCUA regulators.”

Cummings wrote that in September, Bedard notified Katahdin that “GNP had very strong prospects to sell its business and that all of the loans by Katahdin would be paid in full from the sale proceeds.”

In January, Katahdin Federal initiated foreclosure proceedings against Inexcon Maine and Bedard in Penobscot County Superior Court. That action is ongoing.

Dan Bleck, a Boston attorney for Great Northern, said Friday that Katahdin’s objection to the landfill settlement “is a legal issue that needs to be resolved by the court.”

“We’ve spoken, but I’m not sure what’s going to happen,” Bleck said about conversations with Cummings. He said it was unlikely that a resolution to Katahdin’s objections would occur this weekend.