Friendly, Feinberg and Mansfield, Circuit Judges.
MANSFIELD, Circuit Judge:
In this nine-year old, factually complex diversity suit by Raymond Spector against his attorney Milton E. Mermelstein, charging the latter with negligence and breach of fiduciary duty in his representation of Spector in certain business transactions, Judge J. Edward Lumbard, sitting by designation without a jury in the Southern District of New York, awarded $250,000 damages to Spector as compensation for loss suffered by him on two loans to the OCM Corporation ("OCM" herein). Upon this appeal Mermelstein contends that the loss was not caused by him but by Spector's own conduct. By way of cross-appeal Spector argues that under New York law it was error for the district court to have denied him prejudgment interest. We affirm the award of damages, reverse the denial of prejudgment interest, and remand for assessment of such interest.
Since the complicated factual picture is recounted in detail in Judge Lumbard's thorough opinion reported at 361 F. Supp. 30 (S.D.N.Y.1972), we see no need for repetition here other than to sketch those highlights that are essential to this opinion.
The suit below arose out of Mermelstein's representation of Spector in the making of two loans totalling $250,000 to OCM, which was the owner of a hotel and gambling casino in Reno, Nevada, operated by the Riverside Casino Corporation ("RCC" herein). Prior to his representation of Spector in the negotiation of these loans Mermelstein had on March 4, 1962, as the representative of a different client which was considering a merger with OCM, learned that OCM and RCC were in financial difficulty. At a meeting on that date with William Miller, the principal stockholder and manager of OCM and RCC, and William Ehrens, an accountant, Mermelstein had been advised that OCM's income was derived entirely from a monthly rental of $37,500 paid to it by RCC under a lease of the hotel and gambling casino to RCC, which operated them. Each monthly rental received by OCM was used entirely by it to make a monthly payment due on three mortgages on the property aggregating $3.8 million. OCM also owed $154,000 to a Mr. Crummer, payment of which was due that week. A default in payment would result in loss of the property, since Crummer held as security for the loan a deed to the property and a cancellation of the lease of it from OCM to RCC.*fn1 Mermelstein rejected the merger but suggested that Miller and Ehrens contact Spector concerning a loan to cover the payment to Crummer.
On March 6, 1962, Miller, Ehrens and Spector met. At some point Mermelstein joined the meeting. Spector was told that as a result of partial payment of the $5 million dollars in mortgages on the property, which reduced the outstanding indebtedness to approximately $3.8 million dollars, OCM's equity in the property amounted to $1.2 million dollars, and that if they could pay off the $154,000 loan and continue operating the hotel and casino, the financial prospects were bright. Mermelstein failed to apprise Spector of his earlier meeting on March 4, or of the fact that OCM's monthly income from RCC was being used entirely to defray its monthly mortgage obligations. Spector agreed to loan not only the $154,000, but an additional $46,000 which was needed to renovate the hotel restaurant. The security for the loan was to be the equity in the underlying property, evidenced by the deed and bill of sale and the cancellation of the lease to RCC. In addition both Spector and Mermelstein were to receive shares of OCM stock.
During the next few days steps were taken to consummate the deal. Spector, with Mermelstein's assistance, arranged for the Bankers Trust Company to make the loan of $200,000 to OCM on March 12, 1962, against OCM's note which Spector endorsed and collateralized with his personal bankbooks. In the meantime, on March 8, 1962, Mermelstein received a telegram from Crummer's escrow agent and attorney, William Bradley, informing him that Crummer had on March 1 extended the time for payment until March 15 and that only $90,000 (rather than the sum of $154,000 earlier represented by Miller) was then due. Mermelstein failed to inquire of Miller about this apparent discrepancy. Nor did he inform Spector of the substantial difference in the amount due.
On March 11, 1962, Mermelstein attended a further meeting which underscored OCM's dire financial straits but again he failed to keep Spector informed. On that date a meeting was held by Ehrens and various third persons,*fn2 to which Mermelstein was invited for reasons that are not entirely clear, to discuss the possibility of a merger between OCM and Terry Industries, a company whose bleak financial outlook rivaled OCM's, at which OCM's need for $1.75 million dollars in interim financing was a prime topic of discussion. Notwithstanding this further evidence that OCM's precarious financial condition jeopardized Spector's $200,000 loan, Mermelstein failed either to delay the disbursement of the money or to inform Spector.
On March 14 Mermelstein received two letters from Bradley, the first confirming the consummation of the loan and the second noting that the deed, the bill of sale and the lease cancellation which comprised Spector's security "are not to be recorded and we have to rely on Miller's good faith in not conveying any of the properties. . . ." While the record is unclear as to whether Mermelstein had previously understood the fragile reed upon which Spector's security rested -- Miller's good faith -- the record is clear that as Spector's attorney he had helped to structure the transaction. Nevertheless, he failed to show Spector the second letter of March 14 or communicate the contents to him.
In late April Miller telephoned Spector to ask for an additional loan of $50,000, to be secured by the same collateral, as exigent circumstances had prevented the use of the $46,000 for the restaurant renovation. Spector testified that he agreed to the loan after receiving assurances from Mermelstein that the loan would be adequately secured. On May 1 Mermelstein prepared a telegram outlining the terms of the loan including the delivery of two OCM shares to Spector and three shares to himself. In early May the loan was consummated.
Because of the rapidly deteriorating financial condition of the casino, which went into bankruptcy in December, 1962, the $250,000 loaned by Spector to OCM was never repaid. In this action Spector seeks recovery of the $250,000 from Mermelstein on the grounds, among others, that Mermelstein failed to exercise reasonable care and diligence in his representation of Spector and that he was guilty of both negligence and breach of fiduciary duty in failing to reveal certain material facts to Spector.*fn3 At trial Mermelstein, while giving a somewhat different version of some of the crucial meetings forming the basis of Spector's claim than that testified to by Spector, did not seriously dispute his own failure to disclose certain of the foregoing facts to Spector. Mermelstein's defense was based principally on his contention that Spector's loss was not caused by Mermelstein's conduct but by Spector's own decision, beginning in May, 1962, to become a gambling casino operator, which led to his extending additional personal credit to OCM, his taking over of the operation of the casino, his refinancing of the existing mortgages on the premises, the bankruptcy of the casino and the eventual sale of the underlying properties to a third party, resulting in a loss to Spector far exceeding the initial $250,000 loans. Mermelstein argued that if Spector had merely waited until October 1962, when his $250,000 loans were to become due, he could, upon OCM's default, have recouped the loans. Judge Lumbard found to the contrary, concluding that no matter what course Spector took the $250,000 would have been lost. Mermelstein here contends that this finding was erroneous.
The record supports Mermelstein to the extent of revealing that after making the initial loans of $250,000 Spector became more deeply involved in the OCM-RCC gambling casino venture. However, there was also evidence that this pyramiding of his risk was undertaken in an effort to salvage the investment already made and that it was done with the knowledge and approval of Mermelstein. On May 10, 1962, at Miller's request Spector made an additional loan of $200,000 to OCM, secured by the same collateral as the earlier loans. Miller represented that $150,000 of this latest loan was needed to pay off creditors of the casino. Shortly thereafter Frederick Wageman, an accountant whom Spector had sent to Reno to work for Miller, advised Spector that the new loans were not being used to pay these creditors. OCM's precarious financial condition was now confirmed to Spector, who was advised by Miller that Miller was not in a position to make instalment payments in repayment of the loans.
Faced with the risk that he might lose his entire investment if the venture failed Spector, after consultation with Mermelstein, agreed to a plan proposed by Ehrens and Ben Dranow for the refinancing of OCM's outstanding mortgages in the sum of $3.8 million dollars and for continued operation of the casino with a view to selling it to a buyer at a price that would enable Spector to emerge whole. Specifically the plan called for purchase of the $3.8 million dollars in mortgages at a discount for $2.75 million dollars to be obtained by way of a loan from the Teamsters Pension Fund. OCM's monthly mortgage payments would thus be reduced from $37,500 to about $20,000, making it possible to market the underlying property at a price that might enable Spector to recoup his investment. However, the Teamsters would not grant a mortgage to Miller as he was considered a poor credit risk. Accordingly on June 11 Spector replaced Miller as the operator of both OCM and RCC. Thereafter he persuaded the Teamsters Pension Fund to make the mortgage loan, which was finally consummated on October 15. When the Nevada Gambling Commission indicated that it would not approve his license to operate the casino unless he personally assumed its debts, Spector agreed to do so.
Despite Spector's participation and extension of his personal credit to keep the enterprises going, OCM and RCC continued to fare poorly. In October, when the Teamsters' $2.75 million-dollar loan was finalized, Spector was able to pay off the existing mortgages for approximately $2.3 million dollars. Although the residue, a sum in excess of $400,000, was applied to Spector's personal bank account, it ...