A New York State Supreme Court judge on Wednesday dismissed a lawsuit challenging a $35.1 million lease revenue bond deal completed in April by Troy, N.Y.

As part of the ruling, handed down because of the plaintiffs' failure to meet a procedural deadline, Justice Edward O. Spain of state supreme Court in Rensselaer County also rejected a temporary restraining order that had restricted officials from using proceeds of the transaction to fund some services for the city.

The deal, in which the Troy Industrial Development Authority sold and leased back several city-owned buildings, has gained notoriety in New York State municipal finance circles because part of the proceeds helped cover a fiscal 1992 budget gap.

The lawsuit - filed by Troy attorney Linda Mandel and two city residents, David Barsalow and Hennelore Wilfret - asks the court to rule the bond deal "null and void" and prohibit the city from using the deal's proceeds. Ms. Mandel said the bond deal violates state law.

However, Ms. Mandel, who filed the suit with the state supreme court on July 3 1, failed to show the court proof that she had served notice of the suit to city officials, the deal's underwriter, Prudential Securities and others within a 15-day period. "The failure to file the requisite proofs of service on or before Aug. 15, 1992, constitutes a fatal jurisdictional defect," Justice Spain wrote in his decision.

Ms. Mandel blamed her failure to meet the deadline on city officials, who failed to provide her with certain bond documents. "Because I was getting jerked around by city, i wasn't able to file on time," she said in a telephone interview. "They obviously showed a proclivity to raise procedural issues to block this case."

The lawyer said she and the others would file another suit challenging the deal.

The deficit portion of the Troy bond deal has also received sharp criticism from the New York State comptroller's office and many bond attorneys.

At issue is the use of a portion of the deal's proceeds to cover the city's 1992 budget gab and the failure by city officials to obtain state legislative approval for issue. State law requires that all deficit bond sales receive legislative approval.

However, Troy's bond counsel, Joel H. Moser, said the court's action represents an affirmation of the deal's legality.

"The dismissal was complete and final," Mr. Moser said in a statement. "Lawyers close to the matter feel the law is so clear and the decision is so strong that an appeal is unlikely and if undertaken would result in swift and direct affirmation of the dismissal."

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