BANGOR – Great Northern Paper Inc. fraudulently transferred several of its properties to its owners, Inexcon Maine, for use to secure $3.1 million in loans from Katahdin Federal Credit Union, a federal bankruptcy judge ruled this week.

But the Millinocket-based credit union may have acted in good faith when it gave the loans to Inexcon Maine and can defend its loan agreements at a trial, U.S. Bankruptcy Chief Judge Louis H. Kornreich said in his ruling Wednesday.

A trial date will be set during a Nov. 4 status conference between Kornreich and the attorneys.

In January, the trustee for Great Northern’s bankrupt estate, Bangor lawyer Gary Growe, asked Kornreich to dismiss Katahdin Federal’s claim that it is entitled to be paid back the money from the paper company’s estate.

The trustee, represented by Portland lawyer Daniel Amory, argued at a hearing that Katahdin Federal acted too quickly when it gave Inexcon Maine the loans and should have investigated whether the paper company was financially solvent.

Amory said that if Katahdin Federal had followed its own internal loan-review policies as well as those required by federal credit union regulators, the credit union would have found that the property transfers should not have taken place. Instead, Amory argued in January, the credit union ignored the fact that Inexcon Maine was operating Great Northern at a significant deficit, owing millions of dollars to hundreds of creditors.

“The whole thing was not done as it should be,” Amory said Thursday. “They did not follow any standard underwriting procedures.”

Daniel Cummings, a Portland lawyer representing Katahdin Federal, said Thursday that bankruptcy law does allow a trustee to recover property that was received by someone else in a fraudulent transfer. In this case, the property would be the Inexcon Maine mortgages that are held by Katahdin Federal. But the law states that the trustee must prove whether the recipient of the property – Katahdin Federal – was knowledgeable of Inexcon Maine and Great Northern’s insolvency and gave the loans anyway.

Cummings said he believes Katahdin Federal’s officers acted properly when it dispersed the loans. Tuesday’s ruling by Kornreich, he said, shows that at this point in the legal process the credit union did present enough evidence to show it was working in good faith with Inexcon Maine.

Starting in June 2001, Katahdin Federal gave at least three loans valued at $3.1 million to Lambert Bedard, president of Great Northern, and Inexcon Maine, the papermaker’s parent company.

Prior to the loans, Bedard and Great Northern’s board of directors approved transferring numerous properties, including the Dolby landfill, from Great Northern to Inexcon Maine. The properties were used as collateral to secure the loans, and Bedard has claimed that the borrowed money was spent by Great Northern.

In April 2003, four months after Great Northern was placed under bankruptcy protection, Kornreich ordered that the properties be returned to Great Northern so that they could be sold to Brascan Corp. of Toronto. Brascan would not have been able to operate Great Northern without the landfill, according to state law.

But in his ruling, Kornreich gave Katahdin Federal permission to pursue payment of the loans from Great Northern’s estate because the collateral was given back to the paper company. Kornreich ordered that $3.6 million from the sale of Great Northern to Brascan be placed into an escrow account until he ruled whether the property transfers between Great Northern and Inexcon were legal or fraudulent, which he did this week, and whether Katahdin Federal acted properly in giving the loans, which will be resolved at the trial.

“If the credit union can prove that, they can get the money,” Cummings said Thursday.