Possible to diagnose broken transmission without starting engine?

While I know a little about cars, the bulk of my knowledge came from when I was a kid bolting on stuff to my Honda and racing it illegally. (So, not much.)

My '96 Civic DX (5-speed) recently passed 220k miles, and when on the highway, completely blew up while my wife was driving it. She had it towed home, I attempted to turn the engine over, and it sounded like a loud grinding noise. I figured there was a thrown rod and just chalked it up to age/miles. I called my local mechanic - whom, up to this point, I trusted - and asked him about a replacement engine. He offered to do a swap for $2400, I said that it was too expensive, and he found a cheaper engine and came down to $1700. I mulled it over but didn't have the money, so a few months later when I did (now), I contacted him and he said he could do it for $1800 + tax. Fair enough.

I had it towed there and they said it'd be done by Thursday/Friday of this week.

I went in on Friday, and they said that the new engine works, but the transmission may have been damaged due to the broken connecting rods (they showed me the parts), and that it may be significantly more expensive as it could require a gear repack or a new transmission + labor. They said they would have no idea if the transmission was bad without connecting it to the block and starting the engine.

So, I'm pretty pissed because at no point did they make it clear a replacement transmission was in the cards. Had I known there was even a chance of that happening, I would have sold the car for parts, since it would have clearly exceeded $2400 in parts + labor - which I previously said in conversations with the mechanic that it wasn't worth it.

Two questions, I guess:

-Is their claim of "we must connect the transmission and start the engine to know if there's a problem" true? If not, how could they have diagnosed it?

-Do you think they acted ethically given the background I provided to you?

Thanks a ton, guys. Hopefully this wall of text isn't too much; just wanted to provide enough detail.

The question asked in this post is difficult to answer by those who are inexperienced. Therefore I feel that it better requires an expert advise

Possible to diagnose broken transmission without starting engine? ... She had it towed home, I attempted to turn the engine over, and it .

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Is this an automatic transmission?

Is this an automatic transmission?
1996 Honda Civic DX with 5 speed manual .

Since it is a 5-speed you could try to run it through the gears, if it won't then thats a problem, thats with no engine, but that doesn't not eliminate the problem that is just something to check before doing any work. That would be the only thing you should be able to check not being actually driven, unless they looked at it and could visually see something wrong, not logical but taking the benefit of the dought. But to really know if something is wrong with the trans is to drive it or tear it apart. Not an expert mechanic but have worked on a few trans before. What parts did they show you, and did they say why they thought the trans would have a problem. And they should have probably told you that before or at least called you, not waited until you showed up, but to talk ethics in todays society it's non existent. Keep me updated.

you trusted up till now-
would you like to go hunting for another mechanic you could trust
trust is something that doesn't come easily for a business

seems to me they acted properly
gave you a quote
you wanted cheaper
probably not getting as good an engine

they pulled the engine
found it was serious- broken rods at speeds can cause any number of other damages-

pretty hard for any mechanic to state the transmission is good or bad in this case unless road tested

they advised you- left it to you to make the final decision-
most likely they said
" we feel we can proceed and install the engine and you'll end up with a good running vehicle, but because of the damage shown in the engine we can't guarantee how the vehicle will drive as there may be damage in the drive train. We really won't know untill we finish the installation and drive the vehicle"

where do you find anything dishonest or proper in something like this- where you now don't trust them

simple really- they are leaving it up to you on should they continue or stop right now- consider your risk, consider your options- could cost what you figured- could cost more-

what I consider a pretty darn good business

remember one thing-
don't get too upset-
they are giving you their best advice based on what they now know
they are letting you make the decision
they have time and money involved
you tell them to stop- you either pay some and take the vehicle
or you let them keep the vehicle

when cars come in to a shop on a wrecker hook,,,it is tough to check much of anything,,,worst of all,,the customer usually self diagnoses the problem as he sees it...
To ask the shop to come up with some numbers to repair is a fair thing to ask,,,but to guarantee to be free of defects from other parts is not reality,,,think about it,,,I know many shops that won't take this work in ,,,just for the fear of "it didn't do that before"

when cars come in to a shop on a wrecker hook,,,it is tough to check much of anything,,,worst of all,,the customer usually self diagnoses the problem as he sees it...
To ask the shop to come up with some numbers to repair is a fair thing to ask,,,but to guarantee to be free of defects from other parts is not reality,,,think about it,,,I know many shops that won't take this work in ,,,just for the fear of "it didn't do that before"

well said-