A federal judge in New York has dealt Dominion Federal Savings and Loan Association another setback in its legal battle with Penthouse International Ltd. by refusing to set aside a gigantic court judgment that could cripple the McLean-based institution.

Judge Kevin Thomas Duffy rejected as "totally without merit" the argument of Dominion Federal and its Washington law firm, Melrod, Redman & Gartlan, that they were denied a fair trial last May in their dispute with Penthouse.

Last July, Duffy ordered Dominion Federal and its law firm to pay Penthouse $129 million in damages for "destroying" the company's plans to build a casino-hotel in Atlantic City.

Penthouse alleged that Dominion Federal reneged on an agreement to provide $35 million in financing for the project.

Duffy's decision in U.S. District Court last week essentially upheld the earlier decision.

It means that Dominion Federal now must move to a federal appeals court to try to overturn the $129 million judgment, which it has sharply criticized. Dominion Federal is expected to file the appeal shortly.

In asking for a new trial, Dominion Federal lawyers had cited another lawsuit, this one filed against the federal government by Penthouse Publisher Robert Guccione.

In that suit, Guccione blamed federal Abscam investigators for scuttling the casino project -- a claim Dominion's lawyers said contradicted Penthouse's allegations that the S&L was to blame for the project's collapse.

Duffy rejected the argument that Guccione's lawsuit against the government contradicted Penthouse's lawsuit against Dominion Federal, saying, "The two cases are entirely different."

Duffy wrote, "The injuries claimed are different. {The former} is for lost profits for the period 1980 to 1985; the {latter}, for the period from 1985 to the present."

Dominion Federal's lawyers also said the original trial was unfair because Duffy had questioned during the trial the credibility of one of the key witnesses -- Melrod lawyer Philip Gorelick -- thus damaging his ability to testify effectively.

Duffy denied this charge in his opinion last week, repeated his contention that Gorelick perjured himself, and said he had merely been trying to give Gorelick a chance to redeem himself.

"Now it seems that such a word of advice will be beaten into a shield to protect those who have profaned the court and who, by their prevarications, have sought to undermine justice," Duffy wrote.

Dominion lawyer William Stauffer said Duffy's decision is "disappointing, but not surprising" in light of the earlier decision. "The disappointment really stems from the judge's very short treatment of the grounds for a new trial," Stauffer said.

Penthouse Executive Vice President David Myerson said, "We're satisfied with the decision, obviously. ... It speaks for itself."