I don't have an answer to your question about the elder Hart's mental state, but Mickey Hart left voluntarily, after the fact some months.
It's surprisingly easy to find information on the internet. Here's a quote from this page: http://www.musicianguide.com/biographies/1...ickey-Hart.html
"Following the release of the 1969 Grateful Dead albums Live/Dead and AOXOMOXOA, and the 1970 releases Workingman's Dead and American Beauty, Hart resigned from the group. In response to the enormous debt incurred by the band due to the purchase of expensive equipment, bad bookkeeping, and production cost overruns on the band's albums during the 1960s, Hart had convinced the band to hire his father as a business manager charged with returning the group to profitability. The elder Hart, however, eventually embezzled funds from the group in amounts estimated to be between $70,000 and $150,000. Hart stayed with the band for nine months after the revelation but then resigned out of embarrassment. The Grateful Dead provided him with a stipend, however, and Hart received a three-record advance from Warner Bros. He used the proceeds to build a 16-track studio on the ranch that he rented."