WASHINGTON - A Morris-town, N.J.-based dealer has demanded that a hospital drop plans to call some escrowed-to-maturity bonds and instead clarify for the municipal market that the bonds are noncallable.

Drizos Investments Inc. made the demand through its lawyers in a recent letter to representatives of the Jefferson Memorial Hospital Association.

The letter said Drizos "has already been severely damaged" by the hospital's "improper threat to call" the bonds and is "prepared to litigate" and "take any and all appropriate steps to protect its interests."

Drizos holds a substantial amount of the hospital bonds and would suffer serious losses if they were called, said Brian J. McMahon, a lawyer with the firm of Crummy, Del Dio, Dolan, Griffinger & Vecchione in Newark, which is representing Drizos. Neither McMahon nor Drizos would disclose estimated losses.

The bonds - which the hospital issued in 1975 and 1982 and defeased to maturity with cash in 1988 and 1989 - had been trading as noncallable at a premium of 120% of their principal amount, market participants said.

A dealer that bought the bonds at a premium of 120 would suffer major losses if forced to sell them at 102, they said. The 18-point difference for $1.5 million of the bonds would amount to a loss of $270,000.

Drizos is the second dealer to threaten legal action if the Jefferson hospital bonds are called. Emmet & Co., a Far Hills, N.J.-based dealer, issued a similar warning to the hospital last month, although not as strong as the one from Drizos.

Drizos and Emmet contend that their rights as bondholders and federal securities laws would be violated if the bonds were called before maturity because the hospital did not retain any call rights in the escrow agreement. The bonds are not due to mature until March 1, 1999.

The two dealers say the Securities and Exchange Commission and the Municipal Securities Rulemaking Board have made clear that issuers that want to call escrowed-to-maturity bonds must explicitly retain their right to call the bonds in the bond documents.

Jefferson Memorial, on the other hand, maintains that the bonds can be called and that it did retain its call rights in the escrow agreement.

Lawyers for the hospital say the SEC and MSRB guidelines and rules may not apply in this case because they were intended to cover situations in which bonds were defeased and escrowed to maturity through refundings. This situation is different, the lawyers say, because the hospital defeased the bonds with its own cash.

Although the hospital believes it can call the bonds and has already refunded them, it has agreed not to proceed with the call until a state or federal court affirms its call right. The hospital is seeking a court opinion because Commerce Bank of Kansas City, Mo., the trustee, is unwilling to call the bonds without one. The hospital's lawyers also have said the hospital is anxious to resolve any issues related to the proposal call.

But Drizos, which claims the proposal to call the bonds has already caused it to suffer losses, could bring court action first, before the hospital, sources say.

Meanwhile, perhaps adding fuel to the fire is a recent letter in which a lawyer who represented the hospital during the defeasance said it is "unclear" whether the hospital has the right to call the bonds.

Donald G. Mueller, Jr. with Armstrong, Teasdale, Schlafly & Davis in St. Louis sent the letter to Emmet to defend himself against allegations that he told dealers and J.J. Kenny Information Services that the bonds were noncallable.

"I did not specifically address the issue of whether or not the call features of the bonds still existed," Mueller said.

J.J. Kenny described some, if not all, of the bonds as "optional call defeased" until May of this year. Mueller said that when he became aware of this in May 1993 he told Kenny that it was ~unclear" whether the hospital's optional call rights still existed.

Drizos' lawyer McMahon says Mueller is confirming that the hospital did not explicitly reserve its right to call the bonds and therefore has no call rights.

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