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Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

ELMER M. KONKEL, WILLIAM H. ) 

DENNLER, JOHN D. LOCKTON, TED B. ) 

WESTFALL and WILLIAM D. ROBERTSON, ) 

) 

Plaintiffs-Appellees, ) 

FILED 

United States Court of Appeals 

'renth Circuit 

JAN 3 0 igag 

ROBERT L. HOECKER 

Clerk 

) No. 86-1662 

vs. ) 

) 

CONTINENTAL CASUALTY COMPANY, ) 

) 

Defendant-Appellant. ) 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OKLAHOMA 

(D.C. No. 84-C-62-E} 

Peter Van N. Lockwood, of Caplin & Drysdale, Chartered, 

Washington, D.C. (Joseph R. Roberts, of Rhodes, Hieronymus, Jones, 

Tucker & Gable, Tulsa, Oklahoma, William H. Hinkle, of Doerner, 

Stuart, Saunders, Daniel & Anderson, Tulsa, Oklahoma, William A. 

Wineberg, of Broad, Schulz, Larson & Wineberg, San Francisco, 

California, and Elihu Inselbuch, New York, New York, with him on 

the brief), for Plaintiffs-Appellees. 

D. Kendall Griffith {Thomas M. Hamilton, David H. Levitt and 

Joshua G. Vincent with him on the brief), of Hinshaw, Culbertson, 

Moelmann, Hoban & Fuller, Chicago, Illinois, for DefendantAppellant. 

Before*ANDERSON and BALDOCK, Circuit Judges and PARKER, District 

Judge. 

* Honorable James A. Parker, United States District Judge for the 

District of New Mexico, sitting by designation. 

Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 1 
BALDOCK, Circuit Judge. 

The question presented in this case is whether the district 

court properly exercised jurisdiction under the Declaratory 

Judgment Act, 28 U.S.C. § 2201, in an accountant's suit seeking a 

declaration as to the amount of coverage provided by his 

malpractice insurance policy, where the existence of coverage 

remains dependent upon (1} the outcome of a collateral action 

charging the accountant with securities law violations and (2) a 

determination that any liability he incurs is not excepted from 

the terms of the policy. We affirm. 

I. 

In February 1964, defendant-appellant, Continental Casualty 

Company (Continental), issued an Accountants' Professional 

Liability Policy to the accounting firm of Kunkel & Co. The 

policy, which was effective through January 1967, named plaintiffappellee, Elmer Kunkel (Kunkel) an insured. Among other things, 

the policy as amended limited Continental's potential liability 

for Kunkel's acts and omissions to "$40,000 Each Claim." The 

policy, however, excluded liability arising out of "any dishonest, 

fraudulent, criminal or malicious act or omission" on the part of 

the insured. 

Beginning in 1973, Kunkel became a defendant in various class 

action lawsuits charging him and related parties with federal 

securities law violations. According to the allegations, Kunkel 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 2 
disregarded and failed to disclose material facts in preparing 

audit reports, registration statements and prospectuses for three 

security offerings by Home-Stake Production Company, an oil and 

gas concern. It is alleged that Kunkel's conduct renders him 

liable to investors in Home-Stake's 1964, 1965 and 1966 drilling 

projects. The actions were consolidated in the United States 

District Court for the Northern District of Oklahoma under HomeStake Prod. Co. Sec. Litig., M.D.L. 153 (1974} (Home-Stake 

litigation). 

Kunkel tendered the defense of the lawsuits to Continental in 

July 1974, and again in October 1976. Finally, after the filing 

of the second amended complaint, Continental sent a reservation of 

rights letter to Kunkel in April 1980, offering to pay for his 

defense in the Home-Stake litigation. The letter provided: 

The charges made against you in the Second Amended 

Complaint allege violations of the anti-fraud and other 

provisions of the federal securities law, as well as 

charges of conspiracy. • • • This reservation of rights pertains to the allegations of fraud and intentional 

misconduct made against you by all Plaintiff class and 

sub-class members in the Second Amended Complaint for 

the reason that the coverage agreement contained in your 

insurance policy specifically excludes coverage for 11 any dishonest, fraudulent, criminal or malicious act or 

omission of the insured." 

Because of the opinion of Continental Casualty Company 

that there may be no coverage extended for you under the 

Continental Policy ••• Continental Casualty Company 

will not designate an attorney to represent you pursuant 

to this letter, but request that you designate an 

attorney of your own choice to represent you • • • • 

Continental Casualty Company agrees to pay reasonable 

attorney's fees and expenses incurred after the filing 

of the Second Amended Complaint • • • • 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 3 
During the course of pretrial proceedings and settlement 

negotiations, a dispute arose between Continental and the class 

action plaintiffs over the limits of liability contained in the 

insurance policy. Continental asserted the language 11 $40,000 Each 

Claim" limited Kunkel's coverage to $40,000 for each of the three 

security offerings, or $120,000. Plaintiffs and Kunkel disagreed. 

Because the policy placed no aggregate limit on the amount of 

coverage, they contended that each class member's grievance 

constituted a separate "claim" within the meaning of the contract. 

With settlement negotiations at an impasse, Kunkel instituted 

this diversity action pursuant to 28 u.s.c. § 1332 against 

Continental in the Northern District of Oklahoma in February 

1984. 1 Count I of the complaint sought a declaration that the 

insurance policy covered the claims asserted against Kunkel in the 

Home-Stake litigation, while count II sought a declaration that 

the limits of liability extended to $40,000 for each claim 

propounded by the individual investors in the Home-Stake 

projects. 2 

1 Kunkel also joined as defendants the named plaintiffs in the 

Home-Stake litigation in order to bind them to any adverse 

decision as to Continental's obligations under the policy. The 

district court subsequently realigned them as plaintiffs in this 

suit so that their positions conformed to their real interests. 

See Farmers Alliance Mut. Ins. Co. v. Jones, 570 F.2d 1384, 1387 

(lOth Cir.), cert. denied, 439 u.s. 826 (1978) (in diversity suit, 

court should scrutinize parties' interests to determine if their 

positions as plaintiffs and defendants conform to their real 

interests). 

2 A third count alleging Continental's duty to defend the 

Home-Stake litigation and reimburse Kunkel for costs and fees 

previously incurred was settled and dismissed. 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 4 
By agreement of the parties, the district court on January 

21, 1985, stayed proceedings on count I pending the resolution of 

factual questions in the Home-Stake litigation which related to 

the coverage issue. Count II, however, became the subject of 

cross motions for summary judgment. During the hearing on the 

motions, Continental not only contested the merits of count II, 

but also argued that count II failed to present a justiciable 

controversy because Kunkel had not been held liable in the 

Home-Stake litigation and no determination had been made that the 

policy covered the class members' claims against Kunkel. On 

August 9, 1985, the district court resolved both issues in favor 

of Kunkel holding that (1} an actual controversy existed between 

the parties and (2) the aggregate limit of the policy was $40 , 000 

multiplied by the number of individual claims against Kunkel. 

Over Continental's objection, the court granted Kunkel 's motion to 

voluntarily dismiss count I on August 27. Continental appeals , 

challenging only the district court's exercise of jurisdiction 

over count II. Our jurisdiction to review this matter arises 

under 28 u.s.c. § 1291. 3 

3 As a jurisdictional matter, we initially note that the district 

court failed to enter a "final judgment" on a separate document as 

required by Fed. R. Civ. P. 58. Nevertheless, the circuit court 

has jurisdiction of "final decisions" of the district court under 

28 U.S.C. § 1291. If no question exists as to the finality of the 

district court 's decision , the absence of a Rule 58 judgment will 

not prohibit appellate review. Bankers Trust Co. v. Mallis, 435 

u.s. 381, 382-88 (1978); Stubbs v. United States, 620 F.2d 775, 

776 n.l (lOth Cir. 1980); see also Soo Line R.R. Co. v. Escanaba & 

Lake Superior R.R. Co., 840 F.2d 546, 549 (7th Cir. 1988) (unless 

the circuit court is "to become a citadel of technicality" noncompliance with Rule 58 does not ~ se obstruct appellate 

(footnote continued on next page) 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 5 
II. 

The starting point for our discussion must be the relevant 

language of the Declaratory Judgment Act: "In a case of actual 

controversy within its jurisdiction ~ •• any court of the United 

States, upon the filing of an appropriate pleading, may declare 

the rights and other legal relations of any interested party 

seeking such declaration, whether or not further relief is or 

could be sought." 28 U.S.C. § 2201 (emphasis added). As is 

evident from its wording, the Act embraces both constitutional and 

prudential concerns. 

Recognizing that under our Constitution the federal judicial 

power extends only to "cases 11 or 11 controversies," U.S. Const. art. 

III, § 2, Congress confined the declaratory remedy .. to cases of 

actual controversy." United States v. Fisher-Otis Co., Inc., 496 

F.2d 1146 (10th Cir. 1974). Because the word nactual 11 has been 

construed as providing emphasis rather than definition, the 

operation of the Act is procedural only. The Act merely provides 

a procedure empowering a federal court to declare the legal rights 

and obligations of adversaries engaged in a justiciable 

controversy. Aetna Life Ins. Co. v. Haworth, 300 u.s. 227, 240 

(1937). 

(footnote continued from previous page) 

jurisdiction). In this instance the district court has disposed 

of each count in the complaint. Thus, we may properly exercise 

jurisdiction over this appeal. 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 6 
But the existence of a "case" in the constitutional sense 

does not confer upon a litigant an absolute right to a declaratory 

judgment. Green v. Mansour, 474 U.S. 64, 72 (1985). "The 

Declaratory Judgment Act was an authorization, not a command. It 

gave the federal courts competence to make a declaration of 

rights; it did not impose a duty to do so.n Public Affairs 

Assoc., Inc. v. Rickover, 369 u.s. 111, 112 (1962). Whether to 

entertain a justiciable declaratory judgment action is a matter 

committed to the sound discretion of the trial court. Alabama 

State Fed'n of Labor v. McAdory, 325 u.s. 450, 462 (1945). 

Therefore, our inquiry is two-fold. A determination of the 

district court's subject matter jurisdiction is a question of law 

reviewable de novo on appeal. Walden v. Bartlett, 840 F.2d 771, 

772-73 {lOth Cir. 1988). The decision of the district court to 

affirmatively exercise its discretion and issue a declaration 

under the Act in the presence of jurisdiction, however, will not 

be overturned absent a showing of clear abuse of that discretion. 

Farmers Alliance Mut. Ins. Co. v. Jones, 570 F.2d 1384, 1386 (lOth 

Cir.), cert. denied, 439 U.S. 826 (1978); Western Casualty and 

Surety Co. v. Teel, 391 F.2d 764, 766 (lOth Cir. 1968). Contra 

Tempco Elec. Heater Corp. v. Omega Eng•r, Inc., 819 F.2d 746, 

747-49 (7th Cir. 1987) (decision to grant declaratory relief 

reviewable de~). 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 7 
A. 

The rule prohibiting federal courts from rendering advisory 

opinions was first enunciated in 1793 when the Supreme Court 

refused to answer questions of international law submitted to 

Chief Justice Jay by Secretary of State Jefferson on behalf of 

President Washington. 3 Correspondence and Public Papers of John 

Jay, 488-89 (1890). Since then, the Court has sought on numerous 

occasions to delineate factors which separate a ''case" or 

"controversy" from a dispute that is hypothetical, abstract or 

academic in character. 

Construing the Declaratory Judgment Act in Aetna Life Ins. 

Co. v. Haworth, 300 U.S. 227, 240-41 (1937), the Court stated: 

"The controversy must be definite and concrete, touching the legal 

relations of parties having adverse legal interests. It must be a 

real and substantial controversy admitting of specific relief 

through a decree of a conclusive character •• " Accord 

Blinder, Robinson & Co., Inc. v. Unites States Sec. and Exch. 

Comm'n, 748 F.2d 1415, 1418 (lOth Cir. 1984), cert. denied, 471 

U.S. 1125 (1985). The declaration of rights, however, need not 

include injunctive or monetary relief. Aetna Life, 300 U.S. at 

241. Nor need the relief granted entirely dispose of the matter. 

A request for relief under the Act may be limited. Further 

necessary and proper relief based upon factual disputes not yet 

resolved may be sought at a later time. 28 u.s.c. §§ 220l-02i 

United States v. Fisher-Otis Co., Inc., 496 F.2d 1146, 1149 (lOth 

Cir. 1974). 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 8 
In Maryland Casualty Co. v. Pacific Oil & Coal Co., 312 u.s. 

270, 273 (1941), the Court recognized that the distinction between 

an abstract question and a "controversy" was blurred. To fashion 

a "precise test" for determining in every instance the presence of 

a controversy was impossible. Instead, the test is "whether the 

facts alleged, under all the circumstances, show that there is a 

substantial controversy, between parties having adverse legal 

interests, of sufficient immediacy and reality to warrant the 

issuance of a declaratory judgment." Id. Even the existence of 

contingencies did not prohibit the Court from issuing a 

declaratory judgment in that case, for it decided that an 

insurer's lawsuit against an injured third party was justiciable 

although any claim the latter might have against the insurer 

depended upon (l) his obtaining a final judgment in state court 

against the insured, and (2) the insured's failure to personally 

satisfy the judgment. 

Relying on Maryland Casualty, we recently held in Allendale 

Mut. Ins. Co. v. Kaiser Eng'rs, 804 F.2d 592 (lOth Cir. 1986), 

cert. denied, 107 s. ct. 3185 (1987), that an insurer's action 

against third-party tortfeasors under the Act presented an actual 

controversy. In All endale, the insurer sought a declaration that 

if held liable to the insured, it would be entitled to judgment 

against the tortfeasors. We explained: "The contingent nature of 

the right or obligation in controversy will not bar a litigant 

from seeking declaratory relief when the circumstances reveal a 

need for a present adjudication... Id. at 594; accord Keene Corp. 

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Appellate Case: 86-1662 Document: 01019724623 Date Filed: 01/30/1989 Page: 9 
v. Insurance Co. of North America, 667 F.2d 1034, 1039-40 (D.C. 

Cir. 1981), cert. denied, 455 U.S. 1007 (1982}. 

Despite Maryland Casualty and its progeny, Continental 

asserts that the district court's construction of the insurance 

policy at this stage of the Home-Stake litigation is meaningless. 

Continental claims that a construction of the policy's limits of 

liability will serve a useful purpose only if Kunkel is held 

liable to the class members and the policy's terms are interpreted 

to cover his liability. Until then, count II according to 

Continental presents nothing more than an abstract question 

dependent upon hypothetical facts. We disagree. 

"Advance expressions of legal judgment upon issues which 

remain unfocused" are impermissible. United States v. Fruehauf, 

365 U.S. 146, 157 {1961). Issues which will likely never come to 

pass should remain undecided. But to conclude that Continental 

and Kunkel are not embattled in a hostile assertion of rights 

within constitutional boundaries would unduly restrict the 

application of Article III. The Declaratory Judgment Act 

"contemplates a pragmatic approach to the determination of legal 

relations in controversy between interested parties." St. Paul 

Fire and Marine Ins. Co. v. Aetna Casualty and Surety Co., 357 

F.2d 315, 316 (10th Cir. 1966); accord Fed. R. Civ. P. 57 

(advisory committee's notes) (petitioner must have a practical 

interest in the declaration sought). The Act enables parties 

uncertain of their legal rights to seek a declaration of rights 

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prior to injury. s. Rep. No. 1916, 83rd Cong., 2d Sess. 1, 

reprinted in 1954 U.S. Code Cong. & Admin. News 3389. 

Certainly a situation may be hypothesized where the number of 

contingencies or the improbability of their occurrence is so great 

that a court would be powerless to render a decision. See 

National R.R. Passenger Corp. v. Consolidated Rail Corp . , 670 

F~ Supp. 424, 429-30 (D.D.C. 1987). But this is not the situation 

in the case before us. That an actual controversy exists between 

Continental and Kunkel is clear. Count II of Kunkel's complaint 

alleges a dispute which is definite and real rather than 

hypothetical . Tha t dispute relates to Continental's r i ghts and 

obligations arising from its contract of insurance with Kunkel. 

Because of the parties' adverse positions with respect to 

Continental's obligations, settlement of the Home-Stake litigation 

prior to a conclusive resolution of count II is a virtual 

impossibility. 

An insurance policy encompasses the insurer's duty to 

exercise diligence and good faith in attempting to settle claims 

against its insured. Insurance Co. of North America v. Medical 

Protective Co., 768 F.2d 315, 321 (lOth Cir. 1985). Moreover, an 

insurer has a "very great duty" to settle within the limits of the 

policy. Hazelrigg v. American Fidelity & Casualty Co., 241 F.2d 

871, 873 (lOth Ci r. 1957). In evaluating the merits of the 

litigation, an insurer is bound to consider its potential 

exposure. But Continental is incapable of doing so until it knows 

the possi ble extent of its liabilit y in the Home-Stake litigation. 

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The District of Columbia Circuit aptly stated: 

If insurance provided only a right to reimbursement 

for final judgments e ntered against the insured, a 

finding of ripeness might be difficult on the facts of 

this case. But the policies' protections are 

considerably broader, including a right to the insurer's 

provision of a defense and active parti cipation in 

settlement. An i nsurer's disclaimer of duty to pay, or 

reservation of rights, undercuts both of these duti es. 

Rubins Contractors, Inc. v. Lumbermens Mut. Ins. Co., 821 F.2d 

671, 674 (D.C. Cir. 1987). The Third Circuit agrees: "It would 

turn the reality of the claims adjustment process on its head to 

hinge justiciability of an insurance agreement on the maturation 

of a suit to a judgment when the overwhelming number of disputes 

are resolved by settlement." ACandS, Inc. v. Aetna Casualty and 

Surety co., 666 F.2d 819, 823 (3d Cir. 1981). 

The dispute over the meaning of "40,000 Each Claim'' can only 

add uncertainty to a settlement process where certainty is sought. 

A declaration on count II might very well affect both parties' 

settlement strategy. To overturn the dist rict court's ruling 

would hinder any hope of such a result. Admittedly, some 

uncertainty remains regarding whether the policy's fraud exclusion 

will deny Kunkel coverage for any liability he incurs. This 

alone, however, did not render the district court powerl ess to 

resolve a second element of uncertainty. Rather, whether to rule 

on count II in this situation was a matter committed to the sound 

discretion of the trial court. Issues of contract construction 

arising out of a justiciable controversy--in this instance the 

Home-Stake litigation--are themselves justiciable and may be 

considered by the federal courts. See id. at 822. 

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B. 

Federal courts as a general rule cite Borchard's treatise on 

declaratory judgments in deciding the propriety of declaratory 

relief. See, ~., Delaney v. Carter Oil Co., 174 F.2d 314, 317 

(lOth Cir.), cert. denied, 338 U.S. 824 (1949). Accordingly, a 

court in the exercise of its discretion should declare the 

parties• rights and obligations when the judgment will (1) clarify 

or settle the legal relations in issue and (2) terminate or afford 

r elief from the uncertainty giving rise to the proceeding. E. 

Borchard, Declaratory Judgments 299 (2d ed. 1941). 4 

That the district court's construction of Kunkel's policy 

limits clarifies the parties' legal relations and affords relief 

from the uncertainty surrounding Continental's obligations is 

beyond doubt. Whether the declaration will expedite a resolution 

of the underlying dispute is less clear. But it certainly 

4 Accord Central Montana Elec. Power Coop., Inc. v. Administrator 

of Bonneville Power Admin., 840 F.2d 1472, 1475 n.l (9th Cir. 

1988); Tempco Elec . Heater Corp . v. Omega Eng'r, 819 F.2d 746, 749 

(7th Cir. 1987); Fort Howard Paper Co. v. William D. Witter, Inc., 

787 P.2d 784, 790 (2d Cir. 1986); Metropolitan Prop. and Liab. 

Ins. Co. v. Kirkwood, 729 F.2d 61, 62 (1st Cir. 1984); Tierney v. 

Schweiker, 718 F.2d 449, 456 (D.C. Cir. 1983). The Sixth Circuit 

has refined the applicable considerations into a framework 

encompassing five factors, none of which would serve to bar 

declaratory relief in this instance: (1) whether the declaratory 

action would settle the controversy; (2) whether it would serve a 

useful purpose in clarifying the legal relations in issue; (3) 

whether the declaratory remedy is being used merely for the 

purpose of "procedural fencing" or "to provide an arena for a race 

for ~ judicata;" (4) whether use of a declaratory action would 

inc rease friction between federal and state courts and improperly 

encroach upon state jurisdiction; and (5) whether there is an 

alternative remedy which is better or more effective. Allstate 

Ins. Coa v. Green, 825 P.2d 1061, 1063 (6th Cir. 1987). 

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eliminates a factor which served only to undermine Continental's 

duty to assess the Home-Stake litigation and engage in good faith 

settlement negotiations. 

While the continuing existence of the coverage dispute 

described in count I prohibits a final and conclusive 

determination of Continental's duties, that issue properly awaits 

the conclusion of the Home-Stake litigation. Although Continental 

has not appealed the district court's dismissal of count I and the 

record i n the Home-Stake litigation is not before us, both Kunkel 

and Continental have represented to the district court i n this 

case that the jury's findings will bear directly on the 

applicability of the fraud exclusion. Thus, it would be a 

complete waste of judicial resources for the trial judge in this 

instance to proceed on count I, with the attending discovery and 

other tri al preparations, when a suit involving similar i ssues has 

been pending for fifteen years. 

A federal court generall y shoul d not entertain a declaratory 

judgment action over which it has jurisdiction if the same factdependent issues are likely to be decided in another pending 

proceeding. See Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 

(1942); Western Casualty and Surety Co. v. Teel, 391 F. 2d 764, 766 

(lOth Cir. 1968}. But nothing in the Declaratory Judgment Act 

prohibits a court from deciding a purely legal question of 

contract interpretation which arises in the context of a 

justiciable controversy presenting other factual issues. The Act 

specifically states that the court "may declare the right~ and 

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other legal relations of any interested party seeking such 

declaration, whether or not further relief is or could be sought." 

28 u.s.c. § 2201 (emphasis added). We recognized in United States 

v. Fisher-Otis Co., Inc., 496 F.2d 1146, 1149 (lOth Cir. 1974) 

that "[a] request for relief may be so limited under the 

Declaratory Judgment Act, and any further necessary and proper 

relief based upon the declaratory judgment and any additional 

facts which might be necessary to support such relief can be 

sought at a later time." Mindful of these precepts, we conclude 

that the district court properly adjudged count II of Kunkel's 

complaint. 

AFFIRMED. 

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