ROCKPORT, MASS. -- In an ordinary summer in this seaside village on Cape Ann, the most talked-about event of the season is likely to be the rescue of a pleasure boater with a balky outboard. This year, however, there were angry letters to be fired off, petitions to be signed, reporters to be stoked with indignant quotes.

The question was: Would Rockport get the new public library for which a local sculptor and patron had left a million dollars in his will? Or would the Smithsonian Institution, which stood to inherit most of the rest of his millions, convince a county probate judge that Rockport hadn't fulfilled the will's conditions and shouldn't receive the bequest?

This morning, only a week and a half before the whole mess was due to wind up in court, the parties in the dispute will hold a press conference on the courthouse steps in nearby Salem to announce a proposed settlement. If the court goes along, the agreement will permit Rockport to pocket its intended million and build its library. The Smithsonian will simultaneously release a statement saying how delighted it is and what a shame it was that its legally impelled actions were "misinterpreted as a challenge" to the will.

But for much of the summer it was shaping up as a nice, lively conflict, the financially nervous but still mighty Smithsonian (1990 budget, $353 million) vs. the little Yankee town (1990 budget, $12.6 million). Locals were getting downright wrought.

What did those meddlesome greedheads down in Washington think they were up to? people were harrumphing. Weren't they already getting roughly $9 million from the wills of Luisita Denghausen and her husband, Franz? The Smithsonian didn't know beans about the Denghausens, anyway.

Whereas people in Rockport knew them well. The Denghausens were the town's patron saints.

They wintered in Boston, in a suite at the Ritz-Carlton, making excursions to the ballet and the symphony and the Museum of Fine Arts. But every summer for 35 years, they came north to this pre-revolutionary community, drawn like generations of artists before them by the play of light on old clapboard houses, the vistas across the harbor and the presence of other artists.

They exhibited their work at various galleries, his sculpture and her paintings, occasionally selling a piece. But if they never conquered the art world, they hardly seemed to mind. Their real gift, it turned out, was for philanthropy.

They gave away millions. Rockport, in particular, had known their quiet generosity for years. Indigent hospital patients would find their bills paid by unknown benefactors; college students in need of loans would receive checks via a local minister without knowing who was supplying the funds.

Every December the Denghausens and their longtime friend and lawyer, Paul Sargent, would huddle over the statements from Luisita's family trusts, deciding how best to give their considerable income away. They bought skylights for the Rockport Art Association, land for a waterfront park, even the patrol boats the harbor master uses to rescue those stranded boaters.

The couple had no children, and when Luisita died in 1986, the Smithsonian received the largest of several charitable bequests, amounting to $3.8 million, for the "acquisition, preservation and exhibition of the American arts of painting, sculpture and graphics."

Her sorrowing husband died the following year at 75, leaving small legacies to a few relatives and friends and several charities, including a $10,000 bequest for every church and synagogue in town. Most of his estate, too, is destined to support the Smithsonian's American art collections and programs, except for that last gift to Rockport. With his bequest, the charming but outgrown granite library built in 1906 as the gift of an earlier philanthropist, Andrew Carnegie, would be replaced. A vacant schoolhouse would be renovated for the new library, to be named in Luisita's memory, so the grateful townspeople thought. The Smithsonian's attorneys thought otherwise.

A hearing was scheduled for Aug. 15. But that was before all the hubbub, with local congressmen weighing in and the Gloucester Daily Times editorializing that the Smithsonian's actions were "decidedly unbecoming" and Rockport kids scrawling their names on a petition. A few outraged locals even canceled their subscriptions to the Smithsonian magazine, an act that had nothing to do with the dispute, of course, but allowed for some ventilation of hostility.

The Smithsonian, abashed at the way Rockporters perceive it and the media have portrayed it, protests that money has never been its motivation.

"We've heard from the citizens of Rockport," says spokeswoman Madeleine Jacobs, who's been bailing valiantly against a tide of disapproving ink. "We've heard from many people who love the Smithsonian and are concerned about what they perceive to be an adversarial stance. We've been very distressed by that. We care a lot about the people of Rockport. We want them to have their library." The institution's only interest, she says, is "to make sure the decedent's wishes are carried out."

Now, as a decidedly relieved Jacobs put it, "everything is going to end up as one big happy story."

It's hard to know what Franz Denghausen, a quiet and rather formal gentleman who is not known to have ever visited the Smithsonian, would have made of the fuss. He and his wife were in some ways citizens of a different and less contentious time, who always dressed for dinner (to which they were summoned by a butler) and who observed that service at the Ritz was no longer what it had been. They did not seek or appreciate publicity for their charitable works, but now that they are gone, they're getting plenty of it.

Like many other New England coastal towns, Rockport is too well loved in summer, when its year-round population of under 7,000 roughly triples. But not even the presence of too many shoppes selling fudge and wind chimes can diminish its essential beauty. Winslow Homer and Childe Hassam painted here. Even in landlocked Midwestern towns, five-and-dimes probably sell playing cards or TV trays bearing likenesses of Rockport's barn-red harbor building draped with fishing buoys, a scene so often painted and photographed that it has an all-purpose name: "Motif Number One."

"It's a slightly rarefied place," says Martha Woodworth, who arrived in Rockport 10 years ago and runs an 800-number psychic hot line, advising callers by means of tarot and astrological readings. Rockporters are "isolated, but they're smart," she says. "And they do not like to be deprived of what they think is their due."

They think they're due a new library. The Carnegie Library is a Beaux-Arts jewel so overstuffed that its spreading bookshelves have blotted out windows. Any novel that doesn't circulate once in 18 months, classics excepted, is a goner. There's no access for the handicapped, no meeting room, no bathrooms for its patrons.

It was Ann Fisk, director of the Rockport Art Association, former library trustee, former Board of Selectmen member and all-around local ubiquity, who mentioned this state of affairs to Franz Denghausen. "I was his funnel to the town," says Fisk, who often had dinner at his home, particularly in the months after Luisita's death. In the spring of 1987, she says, Denghausen told her that he'd been reviewing his estate and had enough to help build a new library. "He said a million dollars and I practically fell on the floor."

The Tarr School, originally built in the 1860s as part of a cotton mill that made schooner sails, was about to become vacant as Rockport moved its students into a brand-new school complex. The old building was nearly four times the size of the present library.

Library Director Stephen Rask felt as if he'd won the lottery. He arranged for Denghausen and the chairman of the library board to visit nearby Reading, which had also converted an unused school to a library. "It's wonderful and spacious and quiet, virtually everything this little one wasn't," Rask says. "Franz was very impressed." The library's trustees accepted Denghausen's offer in June 1987; Denghausen had Paul Sargent add the bequest to his will in a codicil dated that August.

In October, Denghausen, who had a history of heart attacks, was injured in a fall at his waterfront home, named Coveledge; he never returned from the hospital.

It takes several years to settle a large and complex estate. In the meantime Rockport proceeded with the steps necessary to comply with the Denghausen will, as relayed by the chain of lawyers involved.

The codicil said that if the offer were accepted by the town prior to his death, Denghausen would give $1 million "for the purpose of providing an adequate replacement for the now obsolete Carnegie Library." The gift required that the town "contribute the land upon which such library is to be erected or provide the funds for the renovation of some building now owned by the Town... . "

A special town meeting unanimously voted to confirm the library trustees' acceptance of the gift and appropriated $15,000 for preliminary plans and surveys. That fall the town voted to transfer the school to the library trustees.

But questions were arising. At first the Smithsonian's legal department was concerned about whether the town had formally accepted the bequest. After that was settled, says Rockport Town Counsel Brian Cassidy, "it became apparent that there were differing viewpoints as to what the money could be used for."

Sargent, who as coexecutor with the Cape Ann Savings Bank must remain neutral in this dispute, says he assumes that the Smithsonian must have felt an unusually deep commitment to safeguarding the wishes of Franz Denghausen. Others have expressed less charitable interpretations. "We find it a little disingenuous when the Smithsonian says it's not after his money," Rask says. And Rep. Nick Mavroules (D-Mass.), who's gotten involved in the attempt at settling the parties' differences, says, "I think they wanted the total sum."

The Smithsonian says no. Though like other federal agencies it faces financial strictures of unknown proportions, "the matter of the budget is not relevant," Jacobs says, because it never coveted Rockport's bequest. The Smithsonian also says the legal action eventually taken, petitioning the probate court for clarification of the will, was the executors' idea. Sargent demurs; he says he dragged his heels when it came to going to court but was compelled to file by the prestigious Boston law firm of Choate, Hall & Stewart, hired by the Smithsonian. "Maybe I'm naive, but I really felt that if it led to litigation, which it has in a different form, that would be unfortunate for everyone," he says.

At any rate, the executors did file a "complaint for instructions," asking the court to rule on whether the town had complied fully with the will and was entitled to the $1 million, and on when the interest on that sum (close to $200,000) should have begun accruing. When the Smithsonian's answer to the complaint was filed, both Sargent and the town counsel were surprised by its contention that Rockport could not use the gift to renovate the Tarr School for a new library. It could only use the gift, the Smithsonian's attorneys said, "for the maintenance and operation of a library subsequent to the completion of the renovation of said building."

The Massachusetts attorney general's office saw it differently, siding with the town. "That provision of the will," says Richard C. Allen, chief of the Division of Public Charities, "should be construed liberally under the law of Massachusetts to enable Mr. Denghausen's charitable intent to be carried out."

Rockport, having passed a 1988 bond issue of more than $15 million for its new schools and facing cuts in state aid, cannot pay the estimated $1.2 million in renovation costs without Franz Denghausen's gift, its town counsel says. In fact, its legal fees of $6,730 to date already amount to a substantial chunk of the $42,000 allotted for legal expenses this year.

As word of the impasse and impending court hearing got out via the local press, jaws started to set along Main Street.

Rask remembered that shortly after the will's provisions became known, "someone from the Smithsonian called me here in the library to ask, 'Who was Franz Denghausen?' ... Now they're claiming they know his intent." (This call, spokeswoman Jacobs wants to make plain, was not from anyone in the Smithsonian general counsel's office.)

"His intent for them was American art, it wasn't legal fees," fumes Ann Fisk. The Smithsonian "wanted to look over our shoulder and spend the money the way they thought was proper."

Around town, in the library and at the Toad Hall bookstore and in shop windows, a poster featuring the address of Smithsonian Secretary Robert McC. Adams has begun to appear. Both the Smithsonian and Rep. Mavroules have been getting letters -- not tons, this being a small town, but enough to show that folks are ticked.

Perhaps the most effective response, however, came from psychic-hotline counselor Woodworth. Offended by the Smithsonian's position, she walked over to the Paper Store on Main Street and sent faxes of the Gloucester Daily Times's story on the dispute to five national news organizations, including The Washington Post. It cost her more than 60 bucks but was "well worth it," she says. Movement toward an out-of-court resolution began to pick up steam (possibly coincidentally) not long after the story hit the wire services.

The Gloucester Daily Times editorial cartoonist has portrayed the Smithsonian as a helmeted Goliath with a fat sack of money, towering over a slingshot-armed Rockport Library. But Woodworth envisioned a different depiction: a small troupe of Rockporters creeping up to an edifice labeled "Smithsonian," planting a bomb that says "Media."

The negotiations raged hot and heavy this week, conducted by phone and fax, with the Massachusetts attorney general's office serving as broker and chief go-between.

Finally yesterday afternoon, the litigants agreed on a motion to be submitted to the probate court. It draws on the "doctrine of deviation," under which a court can permit the circumvention of certain details in a will in order to allow the intent to be carried out. In this case, the motion provides that if the town votes to appropriate funds for the renovation of the Tarr School as a library, the executors will turn over the bequest; the town is not required to actually raise or borrow the million dollars first.

The executors are not a party to the motion, though they have indicated their willingness to go along with the plan if the court enters a decree. "I would be delighted if the court does it," Sargent says, "but we won't take the responsibility for deviating from a person's will." He added that while he expected the court to okay the proposed settlement, "Nothing is certain with a court."

But celebratory press releases are flowing nonetheless. It is, suddenly, an era of good feeling.

Rep. Mavroules plans to issue a statement this morning expressing his satisfaction. "I'd think the Smithsonian executives would have sense enough to settle it without this kind of publicity," he'd said earlier in the week. "They don't need that. Quite frankly, I'm surprised they let it get out of hand."

The Smithsonian will declare itself "delighted" and add that "we regret that our involvement in this matter has been misinterpreted as a challenge to Mr. Denghausen's bequest to the town. The Smithsonian acted in accordance with its legal duty to ensure that the terms of the bequest were fulfilled or that the court allow a modification."

The Smithsonian has amassed vast collections of American art, with the National Museum of American Art the primary repository (it holds more than 34,000 paintings, sculptures, graphics and examples of folk art and crafts). That's where most of Denghausen's $5.8 million gift, the amount left over after the library and other bequests, is bound. "Millions of people will be able to enjoy the benefits of that bequest," Jacobs says.

And up in Rockport, Stephen Rask wants very much to believe in a cease-fire. "If -- and after three years I've gotten very cautious about this -- there is a final settlement, signed, sealed and approved by the judge, it will simply be wonderful," he says. "Just super."

He grows downright euphoric about the new library's courtyard garden, the elevators and ramps for the handicapped, the meeting room where movies could be screened, the space for the Rockport Archives, and the bathrooms, lots of bathrooms.

There will also be a nook on the first floor where, as Franz Denghausen once urged, people can have informal conversations without being shushed. "That's where I met the friends of my heart," Rask recalls the elderly sculptor saying of his boyhood libraries. The space is plainly labeled on the architect's preliminary drawings: Franz's Room.