                                                                           FILED
                                                               United States Court of Appeals
                                                                       Tenth Circuit

                                                                     August 20, 2010
                    UNITED STATES COURT OF APPEALS
                                                                   Elisabeth A. Shumaker
                                 TENTH CIRCUIT                         Clerk of Court



 CALIFORNIA DHI, INC.,

               Plaintiff-Appellant/
               Cross-Appellee,                    Nos. 08-1117 and 09-1023
          v.                                             (D. Colorado)
 UDO ERASMUS, an individual, also           (D.C. No. 1:04-CV-01566-MSK-CBS)
 known as PR International, Inc.,

               Defendant-Appellee/
               Cross-Appellant.


                           ORDER AND JUDGMENT *


Before MURPHY, McKAY, and TYMKOVICH, Circuit Judges.



I.    INTRODUCTION

      California DHI, Inc. filed this action pursuant to the Colorado Dissenters’

Rights Statute to determine the fair value of the shares of dissenting shareholder

Dr. Udo Erasmus. At the conclusion of a five-day bench trial, the district court

determined the fair value of Dr. Erasmus’s shares was $778,528.33, and



      *
        This order and judgment is not binding precedent except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
subsequently ordered prejudgment interest in the amount of $280,650,86, for a

total award of $1,059,179.20. Both parties appealed. Exercising jurisdiction

pursuant to 28 U.S.C. § 1291, this court AFFIRMS for substantially the same

reasons as set forth in the district court orders.

II. BACKGROUND

       In the early 1990s, Dr. Robert Collett, a Californian veterinarian, began

taking an interest in developing a food supplement for animals. To do so, he

sought out the help of his brother, Bernard Collett, and Dr. Erasmus, a Canadian

nutritionist and author. In 1994, the three men formed Petscriptions, a Colorado

corporation, which they subsequently renamed Designing Health, Inc. (“DHI”).

Dr. Erasmus, however, also entered into an agreement in 1994 with two

companies, Flora Inc. and Flora Ltd., (the “Flora Companies”) to create

competing supplements. In 1998, after his involvement with DHI had declined,

Dr. Erasmus attended a trade show in Anaheim, California to promote products

made by the Flora Companies which were very similar to those he had formulated

and promoted for DHI. DHI and the Colletts subsequently brought suit against

Dr. Erasmus and the Flora Companies, asserting a variety of claims including

breach of fiduciary duty, intentional misrepresentation, and breach of contract. In

response, Dr. Erasmus resigned from the DHI board, and asserted a variety of

counterclaims against DHI and the Colletts.




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      The case proceeded to trial in the United States District Court for the

District of California and the jury returned a verdict in favor of DHI. As of May,

5, 2003, a net judgment of $796,522.27 (the “California Judgment”) was owed by

Dr. Erasmus and various defendants to DHI. 1

      In late 2003, the Colletts, as majority shareholders of DHI, proposed

merging DHI into California DHI, Inc. (“California DHI”), a California

corporation. The merger agreement provided the effective date of the merger

“shall be the date on which a copy of this agreement and the accompanying

officers’ certificate of California DHI and DHI are filed with the California

Secretary of State.” As of the date of execution, on November 11, 2003, Dr.

Erasmus owned a one-third interest in DHI. At the shareholders’ meeting on that

date, DHI and California DHI approved the merger agreement, and the plan was

filed with the Colorado Secretary of State on November 20, 2003. Although the

merger agreement was tendered to the California Secretary of State shortly

thereafter, technical errors prevented the merger from being consummated until

March 19, 2004.

      On January 30, 2004, DHI advised each of its shareholders of their rights

under Colo. Rev. Stat. § 7-113-102 to dissent from the merger and sell their

shares for fair value. On March 1, 2004, Dr. Erasmus wrote to DHI’s counsel

invoking his dissenter’s rights and demanding purchase of his shares. After the

      1
          The Federal Circuit ultimately reversed this judgment.

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parties were unable to agree on the fair value of Dr. Erasmus’s shares, California

DHI commenced this action pursuant to Colo. Rev. Stat. § 7-113-301 to have the

district court determine their value.

      The district court was presented with two issues: (1) what was the effective

date of the applicable corporate action to which Dr. Erasmus dissented and (2)

what was the fair value of Dr. Erasmus’s shares immediately preceding the

effective date. The district court determined that March 19, 2004, the date the

California Secretary of State filed all of the required merger documents, was the

effective date of the corporate action. It noted this date was consistent with the

language of the merger agreement, as well as California and Colorado law.

      As to DHI’s fair value, the district court was presented with two expert

opinions. Madeleine Mamaux, an experienced business appraiser, opined that

DHI’s value on March 31, 2004 was $3,658,702. Charles Slotkin, an investment

banker with experience in the natural foods industry, valued DHI on March 31,

2004 substantially higher at $7,600,000. In reaching its decision, the district

court first noted that “fair value, for the purpose of Colorado’s dissenters’ rights

statute, means the dissenting shareholder’s proportionate interest in the

corporation valued as a going concern.” Pueblo Bancorporation v. Lindoe, Inc.,

63 P.3d 353, 369 (Colo. 2003) (quotation omitted). The district court then

determined the March 31, 2004 valuations were the appropriate focal point for

determining DHI’s value because of their temporal proximity to the March 19,

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2004 valuation date selected by the district court and because that date balanced

out DHI’s history of depressed last-quarter sales and increased first-quarter sales.

Next, the district court found Mamaux’s valuation opinion more reliable for

several reasons, including her significant appraisal experience, her application of

the fair value standard reflected in Colorado law, her reliance on DHI’s financial

records, and the thoroughness with which she explained and duplicated her

methodology. By contrast, the district court noted there were several gaps in

Slotkin’s methodology, questioned his choice of comparator companies and

products, and discredited his anticipated growth rate calculation.

      The parties, however, also disagreed as to how much Mamaux’s valuation

should be adjusted due to the California Judgment. The district court focused on

the value of the judgment as of March 19, 2004, and ultimately decided the

California Judgment had no effect of the enterprise value of DHI because it was

contingent upon collectability. In addition, the district court rejected Dr.

Erasmus’s argument that DHI’s corporate debt should be subordinated to his own.

The district court concluded instead that because Dr. Erasmus was asserting rights

as an equity holder, he could only claim his proportionate share of the going

concern value of DHI. The district court therefore deducted DHI’s corporate debt

of $1,323,117 to yield a going concern value of $2,335,585, and divided that sum

by three to determine the value of Dr. Erasmus’s share: $778,528.33.




                                          -5-
      The parties submitted additional briefing as to the amount of interest to be

added to this sum, and the district court awarded prejudgment interest at the rate

of 8%, compounded annually, from the effective date of the corporate action,

March 19, 2004. The district court therefore added prejudgment interest in the

amount of $280,650.86, for a total award to Dr. Erasmus of $1,059,179.20.

      Both parties filed motions to reconsider. California DHI argued the district

court erred in selecting March 19, 2004 as the proper valuation date, and in

adopting Mamaux’s March 31, 2004 valuation. Dr. Erasmus argued the district

court erred in subordinating his one-third interest in DHI to DHI’s corporate debt.

The district court denied both motions to reconsider in separate written orders.

As to California DHI’s motion, the district court determined the motion was

inappropriate because it merely re-raised arguments that could have been, and in

some respects were, raised at trial. It nevertheless also reached the merits of the

motion, noting the text of Colorado’s Dissenters’ Rights Statute supported the

district court’s conclusion that the “effective date of the corporate action” was the

date upon which the merger itself took effect. As to Mamaux’s March 2004

valuation, the district court concluded it was reliable, pointing out Mamaux was

California DHI’s own expert and that she employed the same methodology

California DHI had urged the district court to adopt at trial.

      The district court concluded Dr. Erasmus’s motion to reconsider was

similarly inappropriate because it merely related to matters which were, or could

                                          -6-
have been, fully addressed at the time of trial. Nevertheless, the district court

reached the merits and thoroughly rejected Dr. Erasmus’s argument that the

district court had improperly subordinated his one-third interest in DHI to DHI’s

corporate debt. The district court concluded under the Colorado Dissenters’

Rights statute, a dissenting shareholder receives “their proportionate equity from

the corporation only after all corporate debts are satisfied,” and noted that

following Dr. Erasmus’s line of reasoning “would allow the dissenting

shareholder to escape the effect of the accumulated debts of the corporation on

the value of his/her shares.”

       On appeal, California DHI renews its arguments that the district court erred

in determining the effective date of the corporate action and that the district

court’s adoption of Mamaux’s March 31, 2004 appraisal was clearly erroneous.

In addition, California DHI also argues the district court erred in refusing to

adjust its valuation in light of the California Judgment, and erroneously calculated

prejudgment interest. On cross appeal, Dr. Erasmus argues, once again, that the

district court improperly subordinated the debt DHI owed to him to the debts DHI

owed to its remaining creditors.

III.   ANALYSIS

       After careful review of parties’ briefs and the record on appeal, we

conclude the district court correctly determined the “effective date of the

corporate action” pursuant to the Colorado Dissenters’ Rights Statute and the

                                          -7-
prejudgment interest rate; and did not clearly err in finding Mamaux’s March 31,

2004 valuation of California DHI reliable and in refusing to adjust its valuation of

DHI in light of the contingent nature of the California Judgment in favor of DHI.

As to Dr. Erasmus’s cross appeal, we conclude the district court correctly decided

that Dr. Erasmus, the dissenting shareholder, was only entitled to a proportionate

share in the equity of the corporation after all of the corporate debts had been

satisfied.

IV.    CONCLUSION

       Accordingly, we AFFIRM for substantially the same reasons as set forth in

the district court orders.

                                               ENTERED FOR THE COURT


                                               Michael R. Murphy
                                               Circuit Judge




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