When Continental Illinois National Bank foreclosed on the developer at McLean Gardens in May, no one--not even the experts--could tell the 260 unit owners there just what the bank's obligations to them would be for finishing the project and fulfilling the developer's promises.

When First National Bank of Maryland foreclosed at the Chancellor, an unfinished luxury condominium on Washington Circle NW, lone resident Pamela Reeves found that neither the bank nor the original developer thought they were responsible for representations made in the condominium documents she received when she bought there.

Until recently, the question of who is responsible for what when a bank takes over ownership was not an issue--and today it still remains largely unanswered in the law.

During the condo boom of the 1970s, it was almost unheard of for a bank to have to step in and take over a project from a developer. But in the past year, condo developers have been increasingly hard-hit by the depressed housing market that has resulted from soaring interest rates. Unable to sell apartments, some have defaulted on their construction loans--and banks have started to foreclose, becoming the new owners of unfinished condo projects.

"No one anticipated these problems" when condo laws were first being written, said District lawyer Benny L. Kass, who often counsels condominium and cooperative building residents. "It was not an issue generally. To my knowledge, there was not a takeover in the District until recently. It has been in just the last six months that we started having some serious crises."

In addition to the Chancellor and McLean Gardens--the largest condo conversion in the District--the Letterman House, a tenant conversion at 21st and F streets NW, recently was taken over by its lender bank. Some local real estate experts predict that more of these bank takeovers will occur this year as developers find no great upsurge in the market.

At the 1,072-unit Promenade in Bethesda, the owners there have become increasingly concerned about their liabilities because they say the financially strapped developer, American Invsco, cannot pay its bills there. Invsco, which has been able to sell only 40 percent of the cooperative-apartment units, has defaulted on loans from Chase Manhattan Bank, a Chase spokesman confirmed last week, but the spokesman declined to say whether the bank intends to foreclose or look for alternatives.

These situations have brought attention to the fact that there is a void in condominium laws in most states. Just what is the bank responsible for when it becomes owner of an unfinished condominium project and the original developer is no longer involved? In this situation, who do the homeowners go to for satisfaction on the promises a developer made when they bought? Who must fulfill warranties?

In Virginia, a law went into effect just this month that attempts to delineate responsibilities, generally making the original developer obligated for all the work he did and the bank responsible for what is done after it takes over.

In the District and Maryland, however, the law is vague to the point of being meaningless on these issues, real estate legal experts say.

At McLean Gardens, Continental Illinois and the homeowners appear to have reached a satisfactory agreement on most of the issues there, with the bank generally agreeing to fulfill all of the developer's promises to owners, said Joseph O'Malley, an attorney for the owners.

He and other attorneys familiar with the situation credit Continental for being willing to do this without a battle. The original condominium documents appeared to require the bank to do this, they said, but Continental could have chosen to fight in court rather than comply, particularly since District law is silent on the subject, they said. Of course, it is in the bank's interest to do what is necessary to make the development attractive to future buyers since it still has many units to sell, they add.

The case at the Chancellor has taken a much different turn. Pamela Reeves said First National of Maryland took the position that it was merely an owner of apartments there, just like she is, and that it did not have to take over the obligations of the developer, Simon Hershon.

In what may prove to be a precedent-setting case in the District, Reeves has taken the bank to court asking that the bank, as new owner, be held responsible for all the promises Hershon made. She also wanted the bank to buy her out of her contract on the apartment, which she says is now unsaleable without taking a large loss, so she can move to a new job in Houston.

Reeves basically lost the first round of the court case, though the judge did say that the bank had to prepare new condominium documents and that it was responsible for a certain level of security and maintenance.

Any other claims Reeves has should be made against the original developer, the judge indicated.

Reeves now says she may still do that, but there is only one problem: Hershon, she said, told her he has no money to pay her if she wins her case against him.

Hershon and officials of First National Bank of Maryland did not return a reporter's phone calls.

Attorney Kass, now representing Reeves in the case, said he has filed a motion for a new trial based on new evidence. But he says it is a difficult case because of the silence of the law and the lack of legal precedents in the District.

"I'm struggling because no one seems to know," Kass said. "I talked to their the bank's lawyer, and he said, 'I don't know what position I'm in.' "

There is a precedent of sorts across the river in Virginia, at The Representative, a 206-unit luxury high-rise in Arlington, which seems to be the granddaddy of condo project foreclosures in this area. That condo has weathered the storm, and real estate experts say resale values at the building now are about double what they were six years. But the foreclosure sparked a complicated tangle of lawsuits among the various participants, and the owners' suits are continuing.

Chase Manhattan Bank took that project over in 1976, when the partnership building the project and American Realty Trust, partly owned by former Rep. Joel T. Broyhill (R-Va.), failed to pay back construction loans. At the time, there were contracts on units there but no settlements, said an attorney for the owners, Van Sinclair.

"People wanted assurances that somebody would stand behind the building, that things would be fixed," Sinclair said. The building's outer wall was defective, allowing water to seep through, and an estimated $1 million in repairs was needed, he explained. A waterproofing company worked on it in 1977, and again in 1978, but the problem was not eliminated, Sinclair said.

Both the contractor and the bank's subsidiary disavowed further responsibility, saying the problem was with the original structure, Sinclair said, but the developer was out of the picture by then. So in 1980, the owners decided to sue the original construction company, the new waterproofer and the Chase subsidiary.

Thus far, after two years, the owners have won a judgment against the waterproofing company, but the company has asked for an appeal, and the case against the bank subsidary goes to trial in September, Sinclair said.

In the meantime, the owners have had to pay to fix the wall and other disputed items themselves--to the tune of $10,000 for each unit, according to condo association president Stanley Rosenbluth. The work started in the spring and is continuing. If they win their court cases, they can get their money back for the work.

At the time of The Representative foreclosure, a red flag about the legal issues surrounding it was not immediately raised because it then seemed to be an isolated case, real estate experts say. Since then, the group of state representatives that develops model state laws came up with a proposed amendment to its Uniform Condominium Act to deal with the issue, but it has not been adopted in many states.

The new Virginia law, which follows the uniform act amendment, makes lenders responsible for promises they make and work done after they take over ownership, said Stephen G. Johnakin, partner in Thomas & Fiske, a law firm involved in writing the law. The lender can create entirely new condominium documents when it comes in, describing what it will give to future buyers. Liability for work done by the original developer, including on units that have already gone to settlement, is only the original developer's. Buyers who have not gone to settlement can back out of contracts if the new condo documents of the lender are substantially changed, however, Johnakin said.

If the developer goes bankrupt, owners at the time of foreclosure are just out of luck if they have warranty complaints on their units, legal experts say.

"This makes it very important for the purchaser to know the developer," said Robert Diamond, also of Thomas & Fiske. "The key to not getting burned is getting a good developer."

Diamond said that because of the silence of the law on the issue, his firm, in writing condo documents, has put in clauses stating that anyone who takes over the project must fulfill all the obligations in those documents. They wrote the McLean Gardens documents, for example, he said, and that apparently improved the position of owners there.

But lawyers also say that the bank's attitude makes a big difference. If the lender wants to accommodate current owners, they can be much better off than with the original developer, because as a strong financial institution they may be in a better position to do what is necessary to complete the project satisfactorily.

"I think they owners at McLean Gardens are getting a better deal" with the bank takeover, said the O'Malley, the owners' lawyer. "In fact, I know they are." The bank has said it will fulfill all warranties and will increase capital reserves and operating expenses, and construction already has begun on the swimming pool, under an agreement that is in the final stages of negotiation, O'Malley said.

Individual owners there also are crediting a good-faith effort on the part of Continental to live up to obligations there through a new partnership that includes a developer hired to finish the project and sell the remaining units. Some do express concern about the related issue of how the now-empty front acreage is to be developed, a matter that was unresolved when the foreclosure took place. Owners objected to the high-rise office buildings the developer, Arthur Rubloff & Co., wanted to put there, and the bank has modified the plan only slightly to accommodate owners' wishes, they say.

In the meantime, some real estate experts think legal clarification on rights and obligations in foreclosures is overdue in the District and Maryland.

"Now is the time to put something into the law in the District," said G. V. (Mike) Brenneman, condominium specialist and president of the Washington Board of Realtors. "More of these are going to occur. I don't know where or which ones, but it needs to be addressed."

Brenneman was a consultant and marketing agent in the Letterman House tenant conversion, where issues between the unit owners and the bank remain unresolved, and said those connected with that foreclosed project will watch Reeves' case at the Chancellor closely to see how the courts come down on the issues.

Reeves, meanwhile, is making contingency plans in case she finally loses all her legal appeals. She has bought one share of stock in the two banks that were involved in the Chancellor project, so she can go to stockholders' meetings and ask embarrassing questions if she decides that will help.

She may try to talk people out of buying at the Chancellor when the bank tries to sell its 45 units.

And finally, one "last-ditch" possibility she has pondered is turning her luxury town house into a soup kitchen, not a desirable amenity to a project owner trying to sell neighboring apartments.

"I'm just ornery enough to entertain 500 people a day in my apartment if that's what it takes." CAPTION: Picture, Each unit owner at The Representative in Arlington has had to pay $10,000 to cover repairs to this outer wall and other problems. Foreclosure there sparked a tangle of suits. By Frank Johnston--The Washington Post