The Supreme Court dismissed a case widely supported by builders and developers last week after deciding that a Tennessee bank had not exhausted state and local remedies before asking the court to award damages when zoning restrictions wiped out the development potential of property owned by the bank.

The case, a lawsuit from Tennessee called Williamson County Regional Planning Commission vs. Hamilton Bank of Johnson City, raised the question of whether federal, state and local governments must pay monetary damages to a landowner whose property allegedly had been "taken" temporarily under government regulations.

Developers and landowners from all parts of the United States filed briefs and documents supporting the bank in the hope of winning from the Supreme Court a clear legal decision that would require governments to reimburse landowners when regulations such as building density limits reduce the economic value of land.

Numerous state and local governments concerned over the possibility that the court would rule in favor of the bank had rushed to support the defendant, claiming that such a ruling would cripple governmental zoning powers and cost taxpayers thousands of dollars.

In a 7-to-1 decision, the Supreme Court remanded the case to a lower court and reversed a previous damage award. It was the third time in four years that the Supreme Court has dismissed such a case on procedural grounds, angering developers and landowners who believed this most recent case gave the court an "unobstructed opportunity" to clear up an ambiguous part of the law.

"We're disappointed the court failed to take up the merits of the case and, in effect, has delayed making a decision in this important issue," said Jon D. Smock, a lawyer for the National Apartment Association, which had supported the landowner.

"This continues to be a muddled, gray area, and developers and property owners are at the mercy of avaricious county governments until someone else has the wherewithal to launch another case and follow it through to the Supreme Court," Smock continued. "And that's expensive."

The dispute between Hamilton Bank and the Williamson County Planning Commission started in 1973 when local landowner Willie Temple and several associates received 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 to 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 commission 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.

Hamilton Bank argued before a District Court jury that the zoning regulations had rendered the land economically useless because 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; it 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. When the U.S. Court of Appeals for the Sixth Circuit upheld that decision, the county appealed to the Supreme Court.

In its decision, however, the Supreme Court found the bank's claim "premature" and reversed the damage award.

Justice Harry Blackmun, writing for the majority, said that, in reviewing the record of the case, he found that the bank had not made an attempt to get a variance from the county that would have allowed it to develop the property nor had the bank tried to recover damages under a Tennessee law that awards compensation in cases where local governments have taken property for public use.

"Respondent has not yet obtained a final decision regarding the application of the zoning ordinance and subdivision regulations to its property," Blackmun wrote. "We conclude that respondent's claim is premature."

Justice Byron R. White dissented, and Justice Lewis F. Powell Jr. did not vote in the case.

"The Williamson County Planning Commission was very pleased and relieved by the decision," said Robert L. Estes, the lawyer who argued Williamson County's case before the Supreme Court last winter. The Supreme Court "didn't buy all of our case, but they bought enough of it."

Estes had argued that Hamilton Bank should have been required to exhaust all local remedies before turning to the federal courts to decide the case on constitutional grounds.

He said this week, however, that the Supreme Court had not agreed with that completely, citing other cases that had found that exhausting local remedies could hold up a case for many years and amounted to an unfair burden on the landowner.

In this decision, the court said that a developer or landowner need not exhaust all the remedies available at the local and state level, but must do what he or she can to obtain variances and reach a conclusion at the local level before suing for damages.

Estes said he thought the Supreme Court was wary of making such a ruling.

Developers and landowners "feel that issue needs to be cleared up, and they are hoping for a decision that would say 'yes, government must pay,' " Estes said. "But that is a powerful lever that they would then have to hold over the heads of local governments, and I don't think the court is prepared to grant that yet."