Dominion Federal Savings & Loan Association received a modest boost in its legal battle with Penthouse International last week, when a federal judge ruled that a small Washington law firm must share responsibility for paying Penthouse a $128.7 million court judgment.

In July, U.S. District Judge Kevin Thomas Duffy in New York ruled that Dominion illegally reneged on a commitment to lend Penthouse $35 million to help build a casino-hotel in Atlantic City. Penthouse had claimed that Dominion's withdrawal prompted the collapse of the $200 million project.

Duffy's 35-page opinion also blamed Dominion's law firm -- Melrod, Redman & Gartlan -- for helping the McLean-based thrift institution torpedo the deal, but seemed to suggest that Dominion alone would have to pay the damages.

However, in an order last week, Duffy made clear that both Dominion and Melrod, Redman, & Gartlan are "jointly and severally" liable for the judgment -- meaning that both parties, instead of just one, share responsibility for the sum.

Although the order doesn't remove the cloud over Dominion's finances cast by the Penthouse decision, it means that Melrod's malpractice insurance could pay some of the costs, lawyers familiar with the case said.

A Melrod partner declined to specify how much malpractice coverage the 45-lawyer firm has.

Both Dominion and Melrod lawyers responded to news of the judge's order with vows to succeed in overturning Duffy's ruling on appeal. Dominion has hired attorney Arthur Liman, chief counsel to the Senate's Iran-contra investigating committee, for its appeal.

Reading a prepared statement, Melrod partner Stephen Kahn said: "We believe that the decision is without merit and has no basis in the record. We intend to vigorously pursue an appeal of the decision, and we expect to win on appeal."

Penthouse lawyers could not be reached for comment yesterday.

The outcome of the Penthouse case is critical to the future of Dominion Federal, which has accumulated $1.8 billion in assets and almost 150,000 depositors throughout Virginia in its 13-year history.

With a reported net worth of about $74 million, Dominion would be financially crippled if the appeal fails. Dominion Federal is not related to Dominion Bankshares Corp. of Roanoke, one of Virginia's biggest banks.

Already, publicity from the court fight has had an impact on the thrift institution. Dominion Federal reported to savings and loan regulators recently that depositors withdrew $100 million after the decision was announced last July.

Dominion Federal's senior executive vice president, David L. Erickson, said that the situation has since stabilized. While he acknowledged that deposit growth has been slower than it was in the past, he said Dominion has started to build back up.