The Supreme Court heard arguments this week in a case that developers and builders across the country believe is their best chance to win a clear legal opinion on whether goverment should reimburse landowners when regulations, such as building density limits, wipe out the development potential of land.

Numerous state and local governments, concerned over the possibility that the court will rule in the favor of the developers, rushed to the defense of the local government in the case, claiming that such a ruling would cripple governmental zoning powers and cost taxpayers thousands of dollars.

In the past the Supreme Court has held that when the effect of a zoning regulation amounted to a "taking" of private property the remedy was to invalidate the regulation.

However in a case heard by the court four years ago a dissenting minority of four justices said that a particular zoning action had amounted to a taking which should have been compensated. Justice William J. Brennan, who wrote that dissent, said that damages should be awarded cases of overregulation because the mere overturning of such regulations does nothing to discourage the locality from reimposing the same rules in another form.

In that case, San Diego Gas & Electric vs. San Diego, the majority of the court decided against ruling on the merits of the case because of procedural issues, but because one member of the majority indicated he agreed with the minority on the compensation issue, several circuit courts around the country have used the minority opinion as a guide in deciding similar cases.

In the case argued this week, a lawsuit from Tennessee called Williamson County Regional Planning Commisson vs. Hamilton Bank of Johnson City, builders and developers are hoping the court will uphold the decision of the U.S. Court of Appeals for the Sixth Circuit that Williamson County temporarily took from Hamilton Bank the economic use of its land and must therefore pay compensation.

Representatives of the building industry, including the National Apartment Association and the National Association of Home Builders, said they are also hoping that the court will clearly state in a majority opinion its leanings in the San Diego case: that if localities render land economically useless through zoning or other regulatory actions -- even if only temporarily -- they will have to compensate landowners.

"This case gives the court an unobstructed opportunity to say, yes, the Brennan dissent is the law," said Jon D. Smock, lawyer for the National Apartment Association. The plaintiffs are contesting "the facts of the case because, as we see it, they are afraid that if the court gets to the merits it will come down in our favor."

Government entities, including the Justice Department, New York City, 16 states and the territory of American Samoa, have filed arguments supporting the position of Williamson County, claiming that if the court decides governments should be liable to pay compensation or damages to parties affected by their regulations that the cost of government will skyrocket and the ability of government to regulate in the public interest will be severely curtailed. They are asking the court strike down the lower court ruling that the taking must be compensated.

Williamson County has also been supported by arguments filed by a number of organizations representing state, city and county governments and officials, including the National Association of Counties, the National League of Cities, the U.S. Conference of Mayors and the National Governors' Association.

The controversy between Hamilton Bank and the Williamson planning commission started in 1973, when local landowner Willie Temple and several associates got preliminary approval to develop 736 houses on Temple's land in the northern section of Williamson County.

In 1980, after developing most of the subdivision, Temple's development company was denied approval for the final stages of the project by the Williamson planning commission on the grounds that the plan did not conform with the county's zoning regulations. The commission had toughened the zoning code in the intervening years, reducing the number of houses that could be built on the remainder of Temple's land.

The development company defaulted on its loans a month later and Hamilton Bank bought the remaining 258 acres of undeveloped land at a foreclosure sale. The bank then reapplied for permission to build the full complement of houses, which the planning commmission denied, saying again that the plan did not meet the new zoning regulations.

Claiming that the planning commission's denial amounted to a taking of its property in violation of the Fourteenth and Fifth Amendments to the Constitution, Hamilton Bank filed suit in U.S. District Court in early 1981. The bank asked for damages and a ruling that would reverse the planning commission's decision.

Arguing before a jury at the District Court level, Hamilton Bank said that the zoning regulations had rendered the land economically useless because the profits from the reduced number of houses would not even cover the costs of developing the land. Hamilton Bank said it would lose at least $1 million if it built what the planning commission would allow.

The jury agreed, and said that the county could not apply the new zoning regulations. It then awarded the bank $350,000 in damages for the temporary taking of its land, basing that number on the estimated loss of the use of funds during the two year period that the case had been pending.

Despite the jury's verdict, the District Court, on a request from the Williamson County, set aside the damage award on the grounds that because the county would not be allowed to enforce the new zoning regulations there could be no temporary taking under the Fifth Amendment.

The Sixth Circuit reversed that decision and reinstated the award, saying that there was a temporary taking and that it must be compensated. It was at that point that Williamson County appealed the case to the Supreme Court.

In defending its position before the Supreme Court last Tuesday, lawyers for Williamson County argued that the Court of Appeals had "incorrectly interpreted" the evidence in finding that there had been a taking, and that it had erred in considering the minority opinion from the San Diego case as controlling law.

The county argued that the case should not even be in federal court because the bank never had the final approval to develop the land to the full extent and therefore could not have been unjustly denied its development rights. The county also said that the bank never applied for variances or made an effort to work out a better plan that would meet the requirements of the zoning code before it filed suit, options that were available.

"The building plats do not on their face meet the requirements of the zoning regulations," said Robert L. Estes, the Nashville attorney representing the county. "There were administrative remedies the bank could have followed up but didn't. We take the position that under the Fifth Amendment analysis they have to go through the state remedies before appealing to federal courts."

The Justice Department, concerned that a decision in favor of Hamilton Bank could adversely affect the administration of federal land-use regulations, supported the county's position, saying that the bank should have sought compensation for the alleged taking through appropriate Tennessee laws.

Hamilton Bank defended its favorable lower-court decision, saying that the county's defense was "little more than an attempt to rehash all of the disputed factual issues resolved by the jury at trial." The bank said that it only went to court after determining that it would be impossible to reach a compromise with the planning commission that would allow profitable development of the land.

The bank, supported by briefs filed by the building industry, argued for a clear legal opinion on the compensation issue, claiming that compensation was necessary to lessen "the likelihood that a community will continue to play freely with the constitutional rights of its citizenry, be they property owners or housing consumers." It also argued that the claims that such compensation would be fiscally harmful to localities was "exaggerated and unproven."

The Supreme Court is expected to issue a decision in the case in the next several months.