Garfinckel's, the Washington retailing institution that filed for bankruptcy last month, came one step closer to extinction yesterday.

After several weeks of wrangling, more than a dozen attorneys appeared in D.C. Bankruptcy Court armed with a financing agreement that will allow Garfinckel's to borrow up to $3.95 million from First City, Texas-Houston. The funds will pay for bills that range from salaries to utilities and trash removal, as the stores wind down their operations.

But the cost of one budgeted item will go down -- salaries for the company's remaining top executives. Garfinckel's Chairman George P. Kelly's total compensation for his final three months on the job was reduced from a proposed $266,314 to $183,334. Meanwhile, Thomas E. Wendel, chief financial officer, who will stay for six months, will receive $220,000, rather than $289,728.

Some of the company's creditors protested the originally proposed compensation for the two executives.

Kelly, a veteran Chicago and Washington retailer who has headed Garfinckel's for the last two years, called the reduced compensation "fair." He added that if he and Wendel had not remained to close Garfinckel's down, the court would have had to appoint a bankruptcy trustee, who probably would have known less about the retailing business.

"Tom and I work for the creditors," Kelly said. "It costs less to keep us than to pay a trustee with his own lawyers and accountants."

Some Garfinckel's employees have expressed anger at the salaries and lump-sum payments given to Kelly and Wendel as enticements to stay, while employee severance and vacation pay amounting to nearly $837,000 is in doubt.

The agreement for the bank financing was the most important -- and most contentious -- item in the Garfinckel's bankruptcy thus far, according to one attorney close to the case.

The long days of negotiations concerning the bank financing centered on a claim by First City, a member bank of First City Bancorporation of Texas, that it had first call on all of Garfinckel's assets in the bankruptcy proceeding. The bank, which originally lent Garfinckel's $28 million, is still owed $12.4 million of that amount plus whatever is used of the $3.95 million line of credit.

The unsecured creditors, those who have no collateral to back up the money they are owed, challenged First City's claim on all the stores' assets.

The financing agreement, which was approved by Bankruptcy Judge S. Martin Teel Jr. yesterday, grants First City liens on most of the remaining assets of Garfinckel's.

The value of the nine Garfinckel's leases -- from the F Street flagship store to the Annapolis Mall site -- will be determined by an outside real estate consultant and is thought to be the most valuable of Garfinckel's assets.

"Realistically, the leases are worth whatever somebody is willing to pay for them," said Stephen E. Leach, attorney for Garfinckel's. Teel ultimately will decide who will benefit from the sale of the leases. It remains unclear whether the unsecured creditors will receive any payment.

The financing agreement contains a provision that First City will bear the cost of administering the sale of the stores' assets. The final $575,000 of the bank's line of credit will be used to pay for liquidating the merchandise and equipment of the stores.