AUGUSTA – A federal bankruptcy judge was asked Thursday not to order payment of just about all of Katahdin Federal Credit Union’s claim to $3.1 million that it lent the former owner of Great Northern Paper Inc. almost three years ago.

Portland attorney Daniel Amory, representing the trustee of Great Northern’s bankrupt estate, said during a court hearing Thursday that Katahdin Federal’s officers knew Great Northern was financially insolvent at the time it extended three loans totaling $3.1 million to Lambert Bedard and the papermaker’s parent company, Inexcon Maine.

Even though the credit union had that knowledge of insolvency, it ignored its own policies regarding the granting of loans and accepted as collateral several Great Northern properties that were transferred from Great Northern to Bedard and Inexcon Maine, Amory said.

The actions, he said, do not mean that Katahdin Federal engages in malpractice on a regular basis, but that in this particular loan situation, the credit union circumvented its rules to lend the money and accept the properties at a disadvantage to other creditors. He said the actions constituted violations of Maine laws regarding insolvency and fraudulent transfers of property.

Amory also said Katahdin Federal was warned by federal regulators not to give one bigger loan, which Bedard sought initially, because it would exceed a cap on the amount of money a small financial institution can lend.

“I have no ax to grind with these people in general,” Amory said. “[They] just didn’t operate in good faith here.”

Amory said that depositions of Katahdin Federal officers, along with the review of loan and other documents, show that the officers knew, either by discussions in the community or by statements from Great Northern officials, that the paper company had little money in its accounts, was paying suppliers about 90 days after the bills were due, and did not have the capital to proceed with a $130 million modernization of the No. 11 paper machine.

Daniel Cummings, a Portland attorney representing Katahdin Federal, countered that Great Northern was not insolvent. He questioned whether under Maine law a company is insolvent if its balance sheet shows more expenditures than revenues, or if a company is insolvent if its expenses are greater than the value of its assets.

He said Great Northern wasn’t insolvent because its assets were worth more than its liabilities.

“I don’t think there is a beast called equitable insolvency,” Cummings said.

Cummings said Katahdin Federal was acting in good faith when it gave the loans because it believed the money would contribute to the modernization of No. 11, which was done to make the mills profitable, and the long-term benefits would benefit the community.

U.S. Bankruptcy Judge Louis H. Kornreich asked Cummings whether Katahdin Federal knew it was giving the loans to Great Northern or to Bedard and Inexcon Maine. Cummings answered that “the loans would be going through to Great Northern.”

Kornreich then asked why the loans weren’t made directly to Great Northern, and Cummings responded that the credit union “believed at the time they’d be able to make more funds available” if they gave the loans to Bedard and Inexcon Maine.

Kornreich also wondered if “they could circumvent the cap restriction by formulating the loans this way.” Cummings said no, that the credit union could comply with the loan requirements by making separate loans instead of one bigger one.

Starting in June 2001, Katahdin Federal gave at least three loans to Bedard and Inexcon Maine that were secured with properties transferred to them. Most of the properties, including the Dolby landfill, were returned to Great Northern last March under Kornreich’s instruction so that the paper company could be sold to Brascan Corp. of Toronto. But the credit union was given permission by Kornreich at the time to pursue payment of the loans from Great Northern’s estate because the collateral was given back to the paper company.

One of the properties not returned was the guest house, valued at $155,000. Amory, who stated in court Thursday that he believes the properties were transferred fraudulently, said Katahdin Federal should be repaid only that amount because the rest of the properties rightfully were returned to Great Northern.

Kornreich did not rule Thursday on Amory’s request to stop Katahdin Federal’s request for payment in full on its loans. He told attorneys that while he is determining how to rule, they are to proceed with preparing for a trial on the payment request. The trial tentatively is scheduled to start on March 1 and run at least 10 days.