U.S. Denies It Paid Legal Fees for General Dynamics : * Billing: But an attorney claims the company is recovering $3 million in costs.

Lawyers for the federal government and General Dynamics Corp. are locked in a bitter dispute over company efforts to dun the Air Force $3 million in legal fees for the aerospace contractor’s defense of a lawsuit brought by another federal agency.

Government attorneys say General Dynamics has welshed on a promise not to seek reimbursement of costs incurred fighting the Environmental Protection Agency for four years in the suit over air pollution at a Ft. Worth, Tex., Air Force plant where the firm manufactures F-16 fighters.

General Dynamics had contended that, as contractor in charge of the plant, it was a mere hired hand and not responsible for the pollution emitted. The settlement of the case last year was a wash. General Dynamics was assessed a $350,000 penalty. But no money changed hands, because the Air Force agreed to pay the company $350,000 in damages.

Environmentalists were irate, complaining that General Dynamics was getting off without a fine. It appears now, however, that the critics didn’t know the half of it.

In a recent interview, General Dynamics’ attorney in Washington, Herbert L. Fenster of the firm McKenna & Cuneo, told The Times that the firm’s litigation costs of $3 million were being repaid by the Air Force.

It was a stunning assertion, because the settlement agreement--signed by company and government lawyers--appears to bar recovery of legal fees. It states that General Dynamics “shall not seek recovery of costs and attorneys fees in this forum or any other forum.”

However, Fenster explained that General Dynamics would--and probably already had--recovered the money as overhead charged to various Air Force contracts. Government attorneys involved with the settlement, he said, were aware that this was happening.

His assertion brought angry denials from lawyers for the Air Force and the Justice Department. Informed of Fenster’s comments, they said they would never have agreed to a settlement without the firm’s ironclad promise to swallow its legal expenses.

Accordingly, Air Force officials recently sent a letter to Fenster asking whether the fees indeed had been recovered.

The settlement “clearly prohibits General Dynamics from attempting to bill the United States for its costs and attorneys’ fees. Any such bill must be canceled and any payment made returned to the United States,” according to the letter. “If General Dynamics has a claim to reimbursement of these costs, it should make that claim clear and thereby allow the dispute to be resolved in a forthright and open fashion.”

Fenster said he has not yet responded to the letter but insisted again that General Dynamics is entitled to the money.

General Dynamics officials refused to say if they have already recovered the $3 million. “We consider that proprietary,” company spokesman Joe Stout said.

An Air Force official said the legal costs had not turned up in General Dynamics’ bills--at least not in a way they could be recognized. But he said it was possible the company had buried “their fees in overhead, which is vast.”

The official said he expects that General Dynamics ultimately will file a specific claim for the funds, so the matter can be resolved in an “open and aboveboard” way. The claim would be denied, he said, and then litigated before the Armed Services Board of Contract Appeals, a branch of the Pentagon that rules on contract disputes.