The opinion of the court was delivered by: LUMBARD
Raymond Spector, of New York, commenced this suit in 1964 against his former attorney, Milton E. Mermelstein, a citizen of New Jersey, alleging breach of Mermelstein's fiduciary duties to him and negligence in acting as his attorney in connection with two loans totalling $250,000 which Spector made in March and May 1962 to OCM Corporation, which owned a gambling casino in Reno, Nevada, and a loan of $35,000 which Spector made in April 1962 to Rex Sierra Gold Corporation, which owned a California gold mine. Spector was never repaid these loans and he seeks to recover the amounts advanced, with interest.
Trial was had before the court without a jury beginning March 13, 1972, and continuing for a total of fifteen days. For reasons detailed below I find the plaintiff's claims are supported as to the Nevada loans, but not as to the Rex Sierra matter.
Spector and Mermelstein have known one another since 1947. Spector was then a successful advertising man with his own agency. In 1950 disagreements among the stockholders of one of his clients, the Hazel Bishop Corporation, in which Spector was a minority stockholder, led Spector to call upon his attorneys, Gordon, Brady, Caffrey and Keller, with whom Mermelstein was associated, to resolve the difficulties. When matters were settled Spector was the majority stockholder, president and chairman of the board of Hazel Bishop, Gordon was a director and Mermelstein was the company's secretary. Spector thenceforth devoted most of his time to running Hazel Bishop, to which the Gordon, Brady firm became general counsel. This relationship continued until 1955 when it was terminated due to Spector's displeasure over the sale of Hazel Bishop stock by various members of the Gordon, Brady firm, including Mermelstein.
For the next six years virtually no communication passed between the parties, but in the spring of 1961 a rapprochement was effected. By that time Mermelstein was about to leave the Gordon, Brady firm. Spector was no longer an officer of Hazel Bishop, but still served as a consultant and board member. When another stockholder dispute took place Spector again enlisted Mermelstein's aid. Mermelstein helped Spector regain control and himself became a director and secretary of Hazel Bishop.
In the fall of 1961 Mermelstein represented Spector personally in the merger negotiations, consummated in January 1962, between Hazel Bishop and the Lanolin Plus Company. Spector had purchased some $100,000 worth of Lanolin Plus securities, which Mermelstein advised him to sell before he became an officer of the company to be formed as a result of the merger. Spector sold the stock to Mrs. Mermelstein for $25,000 and guaranteed her against loss for one year. In return the Mermelsteins guaranteed Spector one half of any profits realized from a rise in the securities' worth. At another time in 1961 Spector loaned $20,000 to the wife of a friend of the Mermelsteins. These transactions are mentioned to illustrate the nature of the Spector-Mermelstein relationship. In December 1961 Spector wrote to Mermelstein praising his ability and dedication and noting that "words cannot express how thrilled I am that during the past year we have resumed an association that should never have been disturbed."
On Sunday, March 4, 1962 Mermelstein attended a meeting with William Miller, the operating head and principal owner of OCM Corporation and the Riverside Casino Corporation (RCC) in Reno, Nevada, and William Ehrens, Miller's accountant. OCM and RCC were financially unhealthy, and Miller and Ehrens were in New York seeking a remedy in dollars. They met with Mermelstein to discuss merger possibilities between OCM and a corporate client of Mermelstein's. Mermelstein testified that he rejected the proposed merger because his client needed cash, which OCM and RCC could not generate because all of the casino's income was required by OCM to meet its monthly mortgage payments of $37,500. Mermelstein also testified that he learned at the meeting that OCM had a deficit due to these large monthly payments, and that OCM was left "in a continuous loss situation."
Miller told Mermelstein that on behalf of OCM he had borrowed $154,000 in Reno from a Mr. Crummer, a former owner of the casino. As security for this loan Miller had deposited with William Bradley, Crummer's nephew and attorney, the deed and a bill of sale for the property and the casino hotel, and a cancellation of the lease between OCM and RCC. Under Nevada law, a default on the loan would have enabled Crummer forthwith to record the deed and bill of sale without foreclosure proceedings or other ado. Miller said that the loan was due within the week, and that he could not pay it.
At Mermelstein's suggestion, Miller and Ehrens called on Spector on March 6, 1962. They told Spector that Miller had purchased the property and the casino a year or two earlier for five million dollars, and had subsequently paid about $1,200,000 against the total mortgage.
Although the casino had made money during the summer of 1961, an unusually severe winter and operating errors combined to injure RCC's, and thus OCM's, position. They explained that they needed $154,000 to pay off Crummer and keep the property and casino. No one told Spector, however, that Mermelstein had met with Miller and Ehrens on the fourth, or that all of the casino's income was consumed by OCM's mortgage obligations.
Spector and Mermelstein give widely differing accounts of what happened on March 6. According to Spector, Mermelstein telephoned him to tout the investment opportunity and, despite Spector's reluctance, arranged the meeting, brought Miller and Ehrens to Spector's office, and pushed hard for Spector to make the loan. Mermelstein, on the other hand, recalls that he simply relayed Miller's request to Spector, who leapt eagerly for the "deal," and that, when he arrived at Spector's office some time after Miller and Ehrens had arrived, Spector presented him with a fait accompli, adamant in his enthusiasm despite Mermelstein's urgent advice not to go through with it. According to Spector, he wanted Miller personally to guarantee the loan he requested from Spector, as he had Crummer's, but Mermelstein said that it was unnecessary because the equity in the property was $1,200,000 and Spector's protection was ample. According to Mermelstein, he urged Spector to insist on Miller's personal guarantee, but Spector said it was superfluous.
Spector did agree on March 6 to make the loan of $154,000 to repay Crummer. Miller also requested, and Spector agreed to loan, an additional $46,000 to renovate the hotel restaurant, rounding the loan to $200,000. In return Spector was to assume Crummer's position, without the personal guarantee of Miller but with the added sweetener of 10% of OCM's stock and 10% of RCC's stock. For arranging the loan Mermelstein was to receive 2% of OCM's stock.1a The transaction was to be effected immediately. Time was short; the Crummer loan was coming due within several days. From Spector's office Mermelstein telephoned the attorney Bradley in Reno to ask if he could secure an extension on the loan from Crummer, and if he would act, as he did for Crummer, as Spector's escrow agent for the deed, bill of sale, and lease cancellation. Bradley agreed.
The following day, March 7, Spector executed on his letterhead a power of attorney to Mermelstein, and another on a printed form of the Bankers Trust Company. Spector did not actually send his own money to Reno. Instead he arranged for Bankers Trust Company to loan the $200,000 against OCM's note which Spector endorsed and collateralized with his personal bankbooks. On March 7 Spector also wrote a letter to the bank advising that Mermelstein had his power of attorney, that the bank should loan $200,000 to OCM against Spector's guarantee and bankbooks, and that the money should be transmitted to the bank's correspondent bank in Reno, $154,000 to be paid "to the person designated by Mr. Mermelstein" and $46,000 to OCM. The loan was to be repaid in July, August, September and October installments of $50,000 each.
Mermelstein, despite his denial, probably had some hand in the preparation of these March 7 documents, although he was in Washington, D.C. on the seventh and not, as Spector had remembered, in Spector's office. Whether the authorship was primarily, or in part, Mermelstein's is unimportant; the fact is that he was acting and continued to act as Spector's attorney in this matter. Yet he had not advised Spector that all the income from RCC went for OCM mortgage payments, leaving no residue to repay Spector's loan, and that OCM was operating at a continual deficit, even though, as Mermelstein testified, he knew this as a result of his March 4 meeting with Miller and Ehrens.
When Mermelstein got to his office on March 8, after returning from Washington, D.C., he saw the Spector documents of March 7 and a telegram that had arrived at his office on the seventh from Bradley in Reno. The telegram read:
CRUMMER BY LETTER TO MILLER DATED MAR 1 1962 EXTENDED MILLER PAYMENT OF 90,000 UNTIL MAR 15 1962 CRUMMER HAS NO OBJECTION TO MY REPRESENTING [sic] OF YOUR PEOPLE WM O BRADLEY 1 1962 90,000 15 1962
Miller had not said that Crummer had already given him an extension to March 15, or that only $90,000 was then due.
Rather, he had told both Mermelstein and Spector that the Spector loan had to be consummated immediately because the Crummer loan of $154,000 was coming due within the week. Yet, by his own testimony, Mermelstein admitted that he neither told Spector of this telegram from Bradley nor inquired further as to these inconsistencies.
A letter agreement between Spector and Miller on behalf of OCM, setting forth the agreement between the parties, was dated March 8 and apparently not seen by Spector, who had gone to Florida the evening of the seventh,
until the end of the month when Mermelstein gave him a batch of papers regarding the transaction. Mermelstein on the eighth made a number of changes on the first page of this letter agreement and sent the revision out to Reno for Miller's signature. Also dated the eighth were two additional letters from Miller to Spector, one agreeing that Spector should have 12% of OCM's outstanding stock and the other agreeing to sell him 12% of RCC's outstanding stock.
The language of these letters indicates that Mermelstein was involved in their creation, as neither Spector nor Miller is an attorney, and Spector by then was in Florida.
On March 9, Friday, the Bankers Trust Company wired the First National Bank of Nevada that it would send $200,000 the following Monday, March 12, with definite instructions to accompany the transfer.
On Saturday, March 10, Mermelstein wrote three letters. One instructed and authorized the Bankers Trust Company to send the $200,000 to the First National Bank of Nevada with instructions to disburse the money through Bradley to the Beverly Hills Development Corporation (Crummer's company) and OCM.
The Reno bank was not to release the funds until Bradley had advised it that he, as Spector's agent, held in escrow the deed, bill of sale, and lease cancellation, and that he had cancelled the OCM note to Crummer and destroyed the papers held in escrow for Crummer.
The second letter written by Mermelstein on the tenth went to Bradley in Reno. He advised Bradley that the money would be sent out on the twelfth, as the Bankers Trust Company on the ninth had advised the First National Bank of Nevada.
Mermelstein sent the third March 10 letter to Miller. Here again Mermelstein noted that the money was going out to Reno on Monday the 12th. He did not mention the telegram he had received from Bradley with information inconsistent with Miller's representations both as to the amount of the Crummer note and its due date.
On Sunday, March 11, Mermelstein attended another meeting involving possible financing for OCM. Spector was still in Florida. Miller was in Reno. Mermelstein went at the insistent urging of Ehrens, Miller's accountant, who had telephoned him no less than four times on Friday to try to arrange the meeting at a time convenient to Mermelstein. He testified that he had no notion why he was urged to attend until he got to the meeting and was told by Ehrens that another merger involving OCM was under discussion, and that it was important that he be there because Spector would surely ask about the merger and it would somehow "save time" if Mermelstein knew of it in advance.
Apparently the prime mover behind the March 11 meeting was Richard Terker, then president of Terry Industries, Inc., a construction company in desperate financial condition. A Terry prospectus of October 17, 1961 pointed out that the company had been unprofitable for the preceding four years, had an earned surplus deficit of over three million dollars, and current liabilities over a million dollars in excess of current assets. The prospectus covered an offering of over 550,000 shares of Terry common stock; only some 40,000 had been sold.
The March 11 meeting, held at Ehrens' office in the Empire State Building, was attended by Ehrens, Terker, Mermelstein, Benjamin Dranow, Joseph Patrick and Fred Schoeffer. Schoeffer, a finder and arranger of financial deals, was a consultant to Terry. At his instigation Patrick came to the meeting. Patrick had recently become a partner in the investment banking firm of David Baird & Co. Dranow at that time was apparently affiliated in some way with the Teamsters Union. His precise interest in the Riverside Casino has not been made clear throughout the trial, but eventually he was instrumental in securing a mortgage loan for the property from the Teamsters Central States, Southeast and Southwest Areas Pension Fund (Teamsters Pension Fund).
Terker's plan was this: Terry was about to file an amended prospectus to the one then pending. In that prospectus it was essential to include a statement to the effect that Terry had signed a letter of intent to merge with another corporation so that a major Terry creditor might give the company a respite. A merger with OCM would benefit both companies because OCM offered depreciation and Terry replied with a huge tax loss carry forward to balance any income from the casino. Of course, after OCM's mortgage payments the casino's income was exhausted. Some sort of refinancing of OCM was needed.
The testimony of Patrick and Schoeffer establishes that the participants at the meeting discussed the possibility that Patrick would provide some $1,750,000 in interim financing for OCM, and that Dranow would then procure four to five million dollars in permanent refinancing with the aid of a mortgage loan from the Teamsters Pension Fund. Both Mermelstein and Dranow participated actively in the discussions, and Teamster financing was a major topic. Mermelstein testified that although this was the second meeting he had attended with Dranow, he was never introduced to Dranow and did not know who he was or why he was present.
Mermelstein also testified that he arrived late at the March 11 meeting and therefore was not present when Teamster financing was discussed. I do not credit Mermelstein's account, which was contradicted in relevant part by the testimony of both Patrick and Schoeffer.
Terker had brought to the meeting a draft prepared by his attorney of a Terry-OCM letter of intent to merge. This Mermelstein found wholly inadequate, and he stayed late into the night to help prepare an instrument more fit to the purpose. The following day during a recess in Surrogate's Court in Brooklyn Mermelstein received and reviewed a typed version of the final draft prepared the night before.
I credit Spector's testimony that Mermelstein never told him about the meeting or about Terry and Dranow, despite Mermelstein's testimony that he told him of the proposed merger in the next day or so. Mermelstein testified that Spector said he hoped the merger would not go through because Spector was interested in his participation in the casino under the terms of his loan to OCM. But, according to Mermelstein's own testimony, if the proposed merger had been effected Spector would have recovered his $200,000, received stock of the new company worth some $192,000, and retained his interest in the casino as well.
In light of the need for $1,750,000 in interim financing for OCM, which Mermelstein learned of at the meeting, he must have known that Spector's loan of $200,000 was nothing more than a miniscule stopgap and a very risky one. Mermelstein's duty was to acquaint Spector with his knowledge immediately. Instead he told Spector nothing. Yet he did telephone Miller from the meeting. He testified that Miller explained that the Terry deal had been discussed before the Spector loan had arisen, and that he was no longer interested in the merger because he preferred the arrangement with Spector.
Mermelstein having done nothing to alert Spector, nor having made any attempt to delay the disbursement of the money, on Monday, March 12, the $200,000 went out to Reno and was disbursed through Bradley to the Beverly Hills Development Corp. ($154,000) and OCM ($46,000). Also on that date Bradley wrote two letters to Mermelstein, received by him on the 14th.
The first letter described the completion of the transfer as described above, and enclosed copies of the deed, bill of sale, and lease cancellation, as well as a stock certificate ...