BANGOR – Katahdin Federal Credit Union in Millinocket will defend against allegations it participated in a “wrongful scheme” when it made $3.2 million in loans to the previous owners of Great Northern Paper Inc.

The community credit union says it did nothing wrong and adhered to federal regulations. It is going to trial March 1 to seek repayment of the loans from Great Northern’s bankrupt estate.

The date is later than what Katahdin would have liked, said Daniel Cummings, a Portland attorney representing Katahdin Federal. Cummings told U.S. Bankruptcy Judge Louis H. Kornreich Thursday that a quick resolution to the loan dispute was needed because “the magnitude of this loan is significant to the operations of the credit union.”

Katahdin Federal is being sued in bankruptcy court for allegedly participating in “a wrongful scheme to hide the true state of Great Northern’s financial affairs from current and future creditors.” The lawsuit was filed by Boeing Capital Corp., which stated in court documents that it was unaware of the financial transactions between Katahdin Federal and Great Northern’s owners when it loaned the papermaker $50 million.

Beginning in May 2001, Katahdin Federal agreed to loan Inexcon Maine, the parent company of Great Northern, and its co-owner Lambert Bedard, who also was CEO of Great Northern, a series of six loans. Three of the loans were paid back, but $3.2 million was outstanding when the company filed for bankruptcy on Jan. 9, 2003.

On June 1, 2001, Great Northern’s board of directors agreed to transfer certain assets, including the Dolby landfill in East Millinocket, to Inexcon Maine and Bedard. In exchange, the properties were used as collateral for the Katahdin loans, and Inexcon Maine and Bedard gave the loan proceeds to Great Northern.

At the June 1 meeting, Eldon Doody, then Great Northern’s board president, said he had a “moral and fiduciary duty” to notify the board that the company was in “dire need of money” by June 30, 2001, or faced closure, according to minutes of the board’s meeting.

Less than a year after the board meeting, according to court documents, Boeing agreed to loan Great Northern $50 million, which was secured by most of Great Northern’s assets including equipment.

“Great Northern failed to disclose to Boeing that Great Northern had earlier transferred [certain] property to Inexcon and mortgaged the same to Katahdin Federal, and this omission to state material facts constituted a fraud on Boeing,” wrote John McVeigh, a Portland attorney representing Boeing in the lawsuit.

Katahdin Federal, in its court response to the lawsuit, denies the allegations made by Boeing. The credit union stated that it is “without sufficient knowledge” to respond to how Bedard, Inexcon Maine and Great Northern’s board of directors operated their businesses.

Cummings, Katahdin’s attorney, said this week that Bedard and Inexcon Maine initially had asked for a $9 million loan, but the National Credit Union Association told Katahdin that the loan would exceed federal regulations established by Congress. Instead, Katahdin set up a loan package that kept the credit union in compliance with federal rules.

“They [NCUA] didn’t say, ‘no, don’t loan Inexcon money’; they said, ‘no, don’t exceed your cap.'”

The $3.2 million outstanding balance on the loans is one-third of the $9 million that Katahdin Federal can administer in all of its business loans, said Molly Schar, a spokeswoman for the NCUA, on Thursday.

Cummings acknowledged this week that NCUA regulators have visited Katahdin Federal in recent months, but that the audit was nothing out of the ordinary.

Schar said, “At this point, we haven’t taken any administrative action” against Katahdin Federal. She said she didn’t know if any action was pending.

Boeing’s lawsuit is the second one this year pertaining to the questionable loans. In March, attorneys for Great Northern’s bankrupt estate filed suit against Inexcon Maine and Bedard to get the transferred properties, particularly the Dolby landfill, back into the ownership of Great Northern. The landfill was needed to complete a sale of Great Northern’s two mills in Millinocket and East Millinocket to Brascan Corp. of Toronto. Without the landfill being returned to Great Northern, the deal might have fallen through.

Katahdin disagreed with transferring the properties because they were collateral for $3.2 million in outstanding loans.

Judge Kornreich ordered the properties transferred back to Great Northern and Boeing place $3.6 million into an escrow account for future legal determination on the properties worth and whether Katahdin should be paid part or all of the money.

In its lawsuit, Boeing stated that Katahdin should receive only $775,000 for the properties because that is all they are worth. McVeigh said Thursday the landfill was worthless as collateral because state law prohibits it from being sold or used by anyone other than Great Northern or its new owner.

Cummings, however, disagreed. He said the landfill has substantial value because without it, the mills would not have been sold.

Katahdin Federal is pursuing a loan foreclosure action against Inexcon Maine and Bedard in Maine Superior Court in Bangor. In that case, Cummings has asked a judge for a final ruling, but Inexcon Maine and Bedard want that delayed until the bankruptcy case runs its course.

McVeigh said he hopes Katahdin Federal is successful in the foreclosure, which could end the case in bankruptcy court, but he remains doubtful that would occur.

In Katahdin Federal’s recent newsletter to its members, president Don Casko defended the credit union’s loans to Inexcon Maine.

“We made those loans in good faith in the belief that the mills would have been closed and the No. 11 [paper machine] would not have been completed had we not helped out our major employer,” Casko wrote. “We were well secured and believe we will be paid in full when the legal process has run its course. In the meantime, the credit union remains financially strong, working with our members to get through these difficult times.”

He said the credit union “remains well capitalized by regulatory definition at 71/2 percent of assets.” Schar of the NCUA agreed.