An industrial development authority in upstate New York is preparing for whta it hopes will be the last financing for a resource recovery project that has been dogged by environmentalists and a succession of lawsuits.

In a vote last month, the Counties of Warren and Washington Industrial Development Agency gave preliminary approval to a borrowing of $11.25 million to cover cost overruns that Foster Wheeler Corp. incurred in building a 400-ton-a-day trash incinerator in the village of Hudson Falls.

But Foster Wheeler, which contends its losses stemming from delays were more than $20 million, says the borrowing is too small. It has begun a legal proceeding against the agency to compel it to pay more.

Daniel Hayes, the agency's chairman, dismissed the lawsuit as a bargaining tool and said he did not expect the agency's proposed deal to double in size before it is sold to accommodate the company's demands. Underwriter Smith Barney, Harris Upham & Co. could consummate the transaction within a month, he said.

In addition to part of the bond proceeds that will be set aside to cover cost overruns, about $8 million, the deal would include about $3 million to meet an interest payment due in December on the outstanding debt for the project.

About $74 million of debt has been issued to finance the project so far. If the agency goes forward with its planned sale this fall, borrowing for the plant would exceed by at least $30 million the $52 million price tag attached to the plant in 1985.

Now, after the drawn-out litigation and politicking that brought work on the incinerator to a halt for a 10-month period in 1990, the project is nearly ready to start burning garbage. Mr. Hayes said Foster Wheeler has asked county officials to have 400 tons of trash handy for the plant's maiden run on Nov. 4.

But still, the litigation persists. It was Foster Wheeler Power Systems, a subsidiary of the Clinton, N.J.-based Foster Wheeler Corp., that reportedly served legal papers to the development agency demanding payment of $11 million more than the agency plans to pay for cost overruns.

In addition, the developer of the incinerator is seeking repayment of $1.48 million that Smith Barney, Harris Upham & Co. allegedly exacted from Foster Wheeler to help sell a 1989 bond deal, The Post-Star of Glenns Falls, N.Y., reported.

To observers familiar with the project, it is almost the logical conclusion to a story that seemed bent on carrying litigation to its absurd extreme. Foster Wheeler and the agency are technically partners in Adirondack Resource Recovery Associates, the joint venture building the Hudson Falls incinerator.

The most recent suit has "brought everything full circle," said Linda S. Tremblay, a member of the board of trustees of the village of Hudson Falls. "Now I think everybody has sued everybody."

At this point, the question of how much money Foster Wheeler deserves in return for cost overruns seems the last legal detail, said one banker on the deal. "The problem is the plant is nearly completed," said the banker, Jonathan W. Wooten, a managing director at Smith Barney. "This is the last financing needed."

According to Mr. Hayes, Mr. Wooten informed the agency's board that the specter of continued litigation could cloud the prospects for the deal and possibly boost borrowing costs by 50 basis points.

Mr. Wooten declined to comment on whether he had made that assessment. "We would like to see the disagreement resolved, but I'm not going to comment on discussions with the authority," he said.

Auditors hired by the agency are examining Foster Wheeler's claim that it deserves $22 million. The auditors are expected to make a presentation to the board of the authority the week of Oct. 20, Mr. Hayes said.

The agency hired Warner Construction Consultants and the Washington law firm of Arent, Fox, Kintner, Plotkin, & Kahn to check into Foster Wheeler's dealings.

"The IDA is not going to let the trustee bank, the Bank of New York, pay any of those cost overrun bills until we approve every one of them," Mr. Hayes said. Bond proceeds to cope with Foster Wheeler's cost overruns will be held in escrow until the audit by the new consulting and law firms is complete.

Mr. Hayes said that the previous consultant advising the authority on the project, Roy F. Weston Inc. of West Chester, Pa., had tried to accommodate Foster Wheeler's assessement of its costs.

He said that as a result, the Hudson Falls incinerator will ultimately cost more than similar Foster Wheeler incinerators in Commerce, Calif., and Charleston, S.C. The Commerce incinerator cost only $62 million to construct and has a capacity 50% greater than the Adirondack facility's, Mr. Hayes said.

Nevertheless, Mr. Hayes praised Foster Wheeler's expertise. "Their workmanship is second to none," he said. "But when it comes down to management and handling millions of dollars, I felt that they were too close to Weston and Weston was not very fair to the IDA." A spokesman for Foster Wheeler declined to comment, and Weston officials were not available.

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