The Appellate Division of the New York State Supreme Court yesterday reversed a lower court's ruling that the state's March sale of $531 million of deficit notes was unconstitutional.

In a unanimous vote, the four-judge appellate division panel overturned an April decision by state Supreme Court Judge Lawrence E. Kahn of Albany County declaring the sale of tax and revenue anticipation notes unconstitutional.

The earlier ruling was made on the grounds that the state sold the securities before adopting its fiscal 1993 budget on April 2 and without voter approval.

The panel said yesterday that the Trans sale "has not been shown to be unconstitutional." The court based its decision on legal precedent that allows the state to appropriate debt and bypass voter approval, according to court documents.

The latest ruling is a significant setback for taxpayer activist Robert L. Schulz, who filed the suit against the state, Gov. Mario M. Cuomo, and the New York State Legislature.

The decision basically upholds a set of legal precedents Mr. Schulz has sought to overturn to void some of the state's bonding activities.

Mr. Schulz, who has also sued the state over the constitutionality of its Local Government Assistance Corp. bonding, said yesterday in a telephone interview that he will appeal the case to the state's highest court, the Court of Appeals, on the grounds that New York has violated its constitution by selling the securities without voter approval.

"This raises a number of serious questions," Mr. Schulz said. "When the courts make it impossible for people to challenge the behavior of government, you have despotism in the extreme."

Nancy Connell, a spokeswoman for the state attorney general's office, which appealed Judge Kahn's ruling for the state, said her office "had anticipated the ruling all along," based on the Wein decisions of the 1970s.

The Wein decisions refer to a set of cases involving Brooklyn Law School Professor Leon E. Wein, who unsuccessfully sued the state in the 1970s for selling debt without taxpayer approval.

Judge Kahn in his April ruling said that the state violated the constitution because it sold the deficit Trans well before its April 2 adoption of the fiscal 1993 budget.

Trans are short-term securities that are billed as repayable in state taxes or state revenues. Judge Kahn ruled that, "The state had no budget upon which to reasonably anticipate the existence of sufficient taxes or revenues ... for the 1992-1993 fiscal year."

"What occurred here was an unconstitutional rollover of state debt without voter approval," he added.

But the appellate division said that under the precedent established in the Wein rulings, Mr. Schulz must show that revenue estimates by the state were somehow "dishonest." The court said the central issue in the case is whether the state could have "reasonably" anticipated that it would have sufficient taxes and revenues in the fiscal 1993 budget to cover the $531 million Trans sale.

"Because plaintiffs have failed to meet their burden of establishing that the 1992-1993 budget estimates were unreasonable or dishonest, the Supreme Court erred in declaring the issuance of $531 million in Trans unconstitutional and reversal is in order," the appellate division said in its order released yesterday.

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