United States Court of Appeals
                         FOR THE EIGHTH CIRCUIT
             ___________

             No. 05-4234
             ___________

American Home Assurance Company, *
                                        *
            Plaintiff - Appellant,      *
                                        *
      v.                                *
                                        *
Kelly Pope; C. Robert Buckley,          *
appointed as legal representative of    *
Bruce N. Strnad, a deceased individual, *
                                        *
            Defendants - Appellees.     *

            ___________
                                            Appeals from the United States
            No. 05-4238                     District Court for the
            ___________                     Western District of Missouri.

American Home Assurance Company, *
                                      *
             Plaintiff - Appellee,    *
                                      *
      v.                              *
                                      *
Kelly Pope,                           *
                                      *
             Defendant;               *
                                      *
C. Robert Buckley, appointed as legal *
representative of Bruce N. Strnad, a  *
deceased individual,                  *
                                      *
             Defendant - Appellant.   *
                ___________

                No. 06-1750
                ___________

American Home Assurance Company, *
                                        *
            Plaintiff - Appellant,      *
                                        *
      v.                                *
                                        *
Kelly Pope; C. Robert Buckley,          *
appointed as legal representative of    *
Bruce N. Strnad, a deceased individual, *
                                        *
            Defendants - Appellees.     *

                                     ___________

                           Submitted: September 25, 2006
                               Filed: June 8, 2007
                                   ___________

Before MELLOY, BRIGHT, and HANSEN, Circuit Judges.
                            ___________

MELLOY, Circuit Judge.

       The late Dr. Bruce Strnad1 had been the treating psychologist for Lester Pope
(“Lester”), a man who admitted to sexually abusing his daughter, Kelly Pope (“Kelly”
or “Pope”). Lester ceased treatment and continued to abuse Kelly for more than a
year, until a social worker who began treating Kelly for emotional trauma reported the
suspected abuse to state officials. This report resulted in a criminal investigation, and
Lester was arrested for the sodomy and attempted rape of Kelly.

      1
          Strnad died in 1993.

                                          -2-
       Kelly sued Dr. Strnad in state court for negligence, alleging that Dr. Strnad
breached his duty of care by failing to warn anyone that Lester had stopped treatment
and presented an ongoing danger to her. Dr. Strnad carried a professional liability
insurance policy from Plaintiff American Home Assurance Company (“American
Home”), and American Home brought a federal declaratory judgment action against
Dr. Strnad and Kelly that sought to establish that American Home did not have a duty
to defend or indemnify Dr. Strnad for damages arising out of his alleged negligence.

       The federal district court initially granted summary judgment to American
Home, ruling that alleged conduct of Dr. Strnad was subject to an insurance policy
exclusion that barred coverage and therefore American Home did not have a duty to
defend or indemnify Dr. Strnad against Kelly’s claims. We reversed that decision on
appeal, finding that Kelly had alleged some causes of her harm that, if proven, might
not be subject to policy exclusions. Therefore, we found that American Home had a
duty to defend Dr. Strnad. On remand, the district court granted summary judgment
to Kelly and Dr. Strnad’s defendant ad litem, Robert Buckley, on both the duty-to-
defend and duty-to-indemnify issues, dismissed the remainder of American Home’s
claims without prejudice, and awarded attorney fees to Kelly and Buckley. American
Home appeals those decisions.

       Prior to the most recent grant of summary judgment, Kelly had obtained a state-
court judgment against Drs. Ray and Strnad, and she raised an equitable garnishment
counterclaim to collect upon that judgment in the federal proceeding. The district
court dismissed that counterclaim without prejudice, and American Home appeals the
district court’s post-dismissal ruling that Kelly’s counterclaim for equitable
garnishment was permissive and could be re-filed in state court. Finally, Buckley
appeals the district court’s dismissal of his counterclaims against American Home for
bad faith, negligence, and breach of fiduciary duty. We affirm in part, reverse in part,
and remand for further proceedings.



                                          -3-
I. BACKGROUND

      A. Factual History

      In 1981, Lester and Nancy Pope formally adopted Kelly, who was then five
years old and had been living with the Popes as a foster child for the two previous
years. Lester sexually abused Kelly throughout the 1980s. In 1988, Nancy Pope
(“Nancy”) found evidence of the abuse and questioned Kelly, who told Nancy that
Lester had been molesting her.

       Nancy called Dr. Joel Ray, a local psychologist. She immediately met with Dr.
Ray and his business partner, Dr. Strnad, and they discussed the situation. After this
meeting, she confronted Lester and demanded that he undergo counseling. Lester
admitted to Nancy that he had abused Kelly, and he began seeing Dr. Strnad. He quit
his therapy after only a handful of sessions, however, and he did not cease his abuse
of Kelly. Drs. Ray and Strnad failed to notify officials within the Missouri Division
of Family Services regarding their knowledge of the abuse, even though Missouri law
required them to do so. Mo. Rev. Stat. § 210.115.1 (requiring certain professionals
to report suspected child abuse to the Missouri Division of Family Services); 

(criminalizing the failure to report such abuse). They also failed to tell
Nancy Pope, law-enforcement officials, or anyone else in a position to prevent the
harm that Lester Pope had stopped seeing Dr. Strnad or that Lester presented a
continuing danger to Kelly.

       In late 1989, Nancy took Kelly to see Lynn Ogden, a social worker in the same
office as Drs. Ray and Strnad, for help with emotional issues stemming from the
abuse. Upon hearing of Lester’s sexual abuse, Ogden reported it to state authorities.
Health officials found that Kelly, now a teenager, had serious physical and
psychological trauma arising from Lester’s molestation of her over the past decade.
After a criminal investigation, the state charged Lester with three counts of sodomy


                                         -4-
and one count of attempted rape. He pled guilty to one of the sodomy charges and
served five years in prison.

      B. Procedural History

             1. Background Proceedings, 1991 to 2002

       The procedural odyssey of this case began in 1991, when Norma Bradley (as
next friend to Kelly Pope) filed a state tort lawsuit alleging, among other claims, that
Drs. Strnad and Ray were negligent per se in violating the Missouri mandatory-
reporting statute and that they breached a common law duty to warn of the danger of
further abuse by Lester. The state trial court dismissed those claims.

       The Missouri Court of Appeals for the Western District upheld the dismissal
of the negligence per se claim, ruling that the mandatory-reporting statute did not
create a private cause of action. Bradley v. Ray, 

, 314 (Mo. Ct. App.
1995). It reversed the dismissal of the common law failure-to-warn claim, however,
holding that Missouri would join the majority of jurisdictions in recognizing a duty
to warn on the part of treating psychologists:

      Specifically, we hold that when a psychologist or other health care
      professional knows or . . . should have known that a patient presents a
      serious danger of future violence to a readily identifiable victim the
      psychologist has a duty under Missouri common law to warn the
      intended victim or communicate the existence of such danger to those
      likely to warn the victim including notifying appropriate enforcement
      authorities.

The Missouri Court of Appeals reversed and remanded the case to the trial
court for a determination of whether Drs. Strnad and Ray breached this duty. 

reasons unclear from the record and unexplained by the parties, Bradley
failed to pursue the case, and the trial court dismissed it without prejudice in 1998.
In 1999, Kelly Pope re-filed the case in state court on her own behalf and included a
common-law failure-to-warn claim against Dr. Ray and a yet-to-be-appointed
defendant ad litem for Dr. Strnad. The court appointed Strnad’s widow, Donna
Strnad, as the defendant ad litem, and the parties commenced pre-trial proceedings.

       As the trial drew nearer, Dr. Ray and Donna Strnad engaged in discussions with
American Home regarding coverage of potential liability under the partnership’s
insurance policy. American Home had been defending both Dr. Ray and Donna
Strnad (as defendant ad litem for Dr. Strnad) under a reservation of rights; both
defendants now demanded that American Home withdraw that reservation and
indemnify them as to any liability arising from the suit. On April 2, 2002, American
Home sent them a letter in which it agreed to defend and indemnify Dr. Ray up to the
policy limits for any liability other than punitive damages. American Home refused
to withdraw the reservation of rights as to the claim against Dr. Strnad, however, and
it gave notice—for reasons set forth below—that it would no longer defend or
indemnify Dr. Strnad’s estate for the claim.

       The next day, American Home filed suit against Kelly Pope and Donna Strnad
in the United States District Court for the Western District of Missouri, seeking a
declaratory judgment that it had no duty to defend or indemnify Dr. Strnad’s estate
because Dr. Strnad’s alleged conduct fell outside the policy language or, in the
alternative, that it was subject to policy exclusions. The policy provided liability
coverage for “any wrongful act committed . . . by the Insured,” and it defined a
wrongful act as “any actual or alleged negligent act, error, or omission.” American
Home argued that the facts alleged in Kelly’s complaint amounted to an assertion of
malicious or intentional misconduct by Dr. Strnad, which would fall outside the policy
definition of a “wrongful act.” In addition, the policy specifically excluded coverage
for claims arising from criminal behavior or from “any wrongful act committed with
knowledge that it was a wrongful act.” American Home argued that both exclusions

                                         -6-
applied, noting that Dr. Strnad’s failure to comply with the Missouri reporting statute
was a criminal act, Mo. Rev. Stat. § 210.165, and contending that his behavior was
also “knowingly wrongful.” Therefore, American Home asserted that it had no duty
to defend or indemnify Dr. Strnad’s estate.

       In response to American Home’s decision to treat Dr. Ray and the Strnad estate
differently, Kelly decided to proceed separately against them. One week after
American Home filed for declaratory judgment, Kelly reached an agreement with
Donna Strnad under Mo. Rev. Stat. §537.065, whereby Kelly would forgo seeking
damages against the Strnad estate directly and instead pursue recovery only from
American Home. In addition, Donna Strnad and Kelly agreed that Robert Buckley
would replace Donna Strnad as defendant ad litem and the parties would submit the
dispute to binding arbitration before a panel of retired Missouri judges. They also
agreed that the arbitration panel need not provide a basis for its ruling other than a
simple finding of whether or not Dr. Strnad was negligent, and Buckley would not
object to any evidence Pope presented to the panel.

      The case then proceeded on three fronts: Kelly’s state-court trial against Ray,
Kelly’s state arbitration proceedings against Buckley (as defendant ad litem for
Strnad), and the federal declaratory judgment suit between American Home, Buckley,
and Kelly.

             2. State Proceedings, 2003 to 2005

       The state-court case against Dr. Ray went to trial in September 2003, and it
came before the jury solely on a theory of Dr. Ray’s vicarious liability for the acts and
omissions of Dr. Strnad. Jury instruction number seven directed the jury to enter a
verdict for Kelly Pope if it found that (1) Drs. Ray and Strnad were business partners;
(2) “Dr. Strnad knew or should have known of an ongoing danger presented to
plaintiff by Lester Pope;” (3) “Dr. Strnad failed to warn of the ongoing danger
presented to plaintiff by Lester Pope;” (4) Dr. Strnad was thereby negligent; and (5)

                                          -7-
his negligence caused harm to Kelly Pope. The instruction did not ask the jury to
specify whether Pope’s damages arose from Dr. Strnad’s failure to warn her mother,
Division of Family Services officials, or someone else who would be in a position to
prevent the harm. The jury found for Pope and awarded five million dollars in
damages against Dr. Ray.

       In early 2004—a few months after the original jury verdict against Dr.
Ray—Pope and Buckley submitted the Strnad claim to arbitration. Because American
Home had previously declined to defend Dr. Strnad, it did not take part in the
arbitration. The parties stipulated to the record from Dr. Ray’s trial and submitted it
as the evidentiary record in the arbitration proceeding. The arbitrators found for Pope
and awarded eight million dollars in damages. Pope submitted the arbitration award
to the trial court. In a single order, the trial court entered judgment upon the
arbitration award against Dr. Strnad as well as the jury verdict against Ray, and it
assessed prejudgment interest for a total award of more than twenty-seven million
dollars against Drs. Ray and Strnad collectively.

      Dr. Ray appealed the judgment against him on several grounds. The Missouri
Court of Appeals affirmed the verdict as to his liability but remanded for a new trial
on the issue of damages because the jury received evidence relating to insurance
coverage without a proper limiting instruction. Pope v. Pope, 

, 463-
66 (Mo. Ct. App. 2005) (en banc). The damages trial has not yet occurred.



             3. Federal Proceedings

       Meanwhile, in federal district court, American Home pursued its effort to obtain
a declaratory judgment that it did not have to indemnify Dr. Strnad’s estate or pay for
its defense against Kelly Pope’s claim. In 2003, shortly before the trial against Dr.
Ray was to begin in state court, the district court granted American Home’s motion
for summary judgment. The district court found that Pope’s complaint clearly alleged

                                         -8-
a “wrongful act” within the language of the policy; as noted above, the policy defined
a wrongful act as an “actual or alleged negligent act, error, or omission,” and Pope had
alleged only negligence. The district court held, however, that Dr. Strnad’s failure to
report the abuse amounted to a criminal act in violation of the Missouri reporting
statute and was therefore subject to a policy exclusion. Thus, the district court ruled
that the Strnad estate was not entitled to coverage and Pope could not collect any
judgment against it from American Home (which effectively meant that Pope could
not collect on any judgment against Dr. Strnad at all, because her prior agreement with
Donna Strnad required her to forgo any effort to seek satisfaction of such a judgment
from the Strnad estate).

       Buckley and Pope appealed to this court, and we reversed the district court’s
grant of summary judgment. Am. Home Assurance Co. v. Pope (American Home I),

, 853 (8th Cir. 2004). In 

, the Missouri Court
of Appeals had held that a common-law duty to warn could encompass a duty to warn
the victim, her care-givers, or other officials as well as (or in lieu of) state social-
services authorities. Pope argued that she had adequately alleged the common-law
failure to warn a person or entity to whom Dr. Strnad was not required to report under
threat of criminal sanction, such as Pope’s mother, as a possible theory of liability in
her state-court petition against Strnad.2 We agreed. American Home 

           Strnad had a statutory duty, under threat of criminal sanction, to report the
abuse to the Missouri Department of Social Services. Mo. Rev. Stat. § 210.115.1; 

. Therefore, his failure to warn state social-services officials fell within
the scope of the policy exclusion for criminal acts. Under Bradley, Strnad arguably
had a common-law duty to warn police or others in a position to prevent the abuse,
such as Pope and her mother. 

. The failure to warn these
individuals was not a criminal act, and therefore the policy coverage arguably applied
to the failure to warn any of them. Compare 

psychologist . . . knows
. . . that a patient presents a serious danger of future violence to a readily identifiable
victim the psychologist has a duty under Missouri common law to . . . communicate
the existence of such danger to those likely to warn the victim including notifying
appropriate enforcement authorities.”) with Comstock v. Walsh, 

, 9 (Mo.

                                           -9-
852. Failing to warn some person or entity other than the Missouri Division of Family
Services would not have been a criminal act under the Missouri statute, but it could
have amounted to common-law negligence under Bradley. Thus, we held that the
district court erred in ruling that the criminal act exclusion applied to all of Pope’s
claims against Dr. Strnad, we reversed the grant of summary judgment in favor of
American Home, and we remanded for further proceedings in the coverage dispute.

        Upon their return to the district court, all parties filed amended claims or
counterclaims. American Home’s two previous claims addressed the policy
exclusions for criminal and knowingly wrongful behavior (Count I) and whether the
alleged conduct fell outside policy language limiting coverage to “any actual or
alleged negligent act, error, or omission” (Count II). On remand, American Home
added four new claims, as follows. First, it argued that if coverage applied, it was
limited by a Missouri statute capping damages for non-economic losses against health
care providers (Count III). Mo. Rev. Stat. § 538.210.1. Second, it alternatively
argued that policy limits should apply to cap American Home’s total, combined
liability for both claims at one million dollars (Count IV). Third, it argued that the
agreement between Kelly Pope and Donna Strnad to submit the claim against Strnad
to arbitration was unreasonable because it was collusive and Strnad’s defendant ad
litem status gave her no authority to enter into such an agreement (Count V). Finally,

Ct. App. 1992) (noting that § 210.115 “requires certain persons . . . to report cases of
suspected child abuse to the Division of Family Services. There is no provision for
making the report to any other person or agency”) (citation omitted). Pope’s state-
court petition broadly alleged Dr. Strnad’s negligent failure to warn Kelly or Nancy
Pope, as well as the failure to notify “the prosecuting attorney, the police or other
peace officer[s], any law enforcement agency, [j]uvenile [o]ffice, the Missouri
Division of Family [S]ervices, or any other protective service agency, office, or
officer.” Of these allegations, only the failure to warn the Missouri Division of
Family Services constituted a criminal act under § 210.115.1 and § 210.165.1, and
therefore the criminal act exclusion clearly applied only to the failure to warn that
particular state agency.

                                         -10-
American Home claimed that Drs. Ray and Strnad were jointly and severally liable
because the jury awarded damages against Dr. Ray on a vicarious-liability theory
(Count VI). Therefore, the court could not force American Home to pay out under
both the Ray verdict and the Strnad arbitration award because it would amount to
double recovery for Pope.

       Buckley added counterclaims alleging bad faith, negligent claims handling, and
breach of fiduciary duty against American Home. Pope, with her twenty-seven
million dollar judgment from the state trial court now in hand, filed a counterclaim to
collect on that judgment under Missouri’s equitable garnishment statute. Mo. Rev.
Stat. § 379.200.

       American Home first moved to dismiss Buckley’s counterclaims because his
status as defendant ad litem—which allowed him to serve as the “named party
defendant” in an action against an insurer—did not give him the authority to bring
claims against the insurer. Mo. Rev. Stat. § 537.021.1(2). The district court granted
the motion, noting the “narrow purpose” of the statute governing defendants ad litem.

        Buckley and Pope moved for summary judgment on the remaining claims. The
district court granted summary judgment to Buckley and Pope as to Counts I and II
of American Home’s complaint on the basis of this court’s opinion in American Home
I. It noted our statement that “American Home has an obligation to provide coverage
under Dr. Strnad’s policy,” American Home 

, and therefore
American Home had a duty to both defend and indemnify Dr. Strnad’s estate for
damages arising from Dr. Strnad’s failure to warn Pope or her mother. Based upon
this conclusion, it granted summary judgment in favor of Buckley and Pope.

      In the same order, the district court dismissed Pope’s equitable garnishment
counterclaim and Counts III through VI of American Home’s complaint sua sponte
and without prejudice, finding that they were “all issues not properly before a federal
court in a declaratory judgment action and should be raised in the state court

                                         -11-
litigation.”3 In a later order, the district court clarified the dismissal of Pope’s
equitable garnishment counterclaim, ruling that it was a permissive counterclaim and
therefore res judicata would not bar her from raising it in subsequent state court
proceedings. Pope did just that, filing a petition for equitable garnishment in state
court roughly three months after the district court’s ruling. That action is currently
pending.

       Shortly after receiving the grant of summary judgment as to Counts I and II of
American Home’s complaint, Pope and Buckley also filed a motion seeking attorney
fees. The district court applied Missouri law governing the right to attorney fees in
state declaratory judgment actions. It found that Missouri grants exceptions to the
American rule governing fees in cases where one party wrongfully subjects another
to collateral litigation and where “very unusual circumstances” exist in which the
court awards fees to balance the benefits of costly litigation. After citing to American
Economy Insurance Co. v. Ledbetter, 

, 277 (Mo. Ct. App. 1995), for
the proposition that trial courts have broad discretion to award attorney’s fees when
justice and equity require it, the district court held that American Home was liable to
Buckley and Pope for their fees and costs in defending the declaratory judgment
action.

       American Home appeals the district court’s grant of summary judgment on
Counts I and II of its complaint, the dismissal without prejudice of Counts III through
VI of its complaint, the ruling that Pope’s equitable garnishment counterclaim was
permissive, and the award of attorney fees. Buckley appeals the dismissal with
prejudice of his counterclaims against American Home. We address each of these
issues below.




      3
         Ray’s appeal from the state-court judgment was pending at the time the federal
district court dismissed these claims.

                                         -12-
II. SUMMARY JUDGMENT ON INDEMNIFICATION

       We first consider whether the district court erred in granting summary judgment
against American Home on Count I of its complaint. As to that count, the district
court held that American Home had a duty to defend and indemnify Strnad’s estate
for damages arising from Strnad’s actions. American Home appeals this ruling,
arguing that American Home I decided only the duty to defend, rather than the duty
to indemnify, and therefore it did not bind the district court to enter an order granting
summary judgment to Buckley and Pope. Specifically, American Home argues that
the district court erred in failing to conduct a factual inquiry into whether those
allegations of Pope’s claim that were not subject to policy exclusions actually gave
rise to damages.

        We review a district court’s grant of summary judgment de novo, and “may
affirm on any grounds supported by the record.” Cottrill v. MFA, Inc., 

,
635 (8th Cir. 2006). As in American Home I, “[w]e construe the facts in the light
most favorable to the non-movant.” American Home 

.



      A. Scope of Our Decision in American Home I

       Our analysis must begin with a clarification of the matters we did and did not
decide in American Home I. American Home I came before this court after the
district court granted summary judgment to American Home on both the duty-to-
defend and duty-to-indemnify issues, which are not synonymous. Allegations subject
to coverage on the face of the policy trigger a duty to defend; the duty to indemnify
is narrower and “must await the facts.” Superior Equip. Co. v. Md. Cas. Co., 

, 484 (Mo. Ct. App. 1998); see also Royal Ins. Co. of Am. v. Kirksville
Coll. of Osteopathic Med., Inc., 

, 807 (8th Cir. 2002) (applying Missouri
law and holding that “even when it has breached the duty to defend, an insurer is still
entitled to a trial on the coverage issue” (quotation omitted)). “The policy covers

                                          -13-
negligent acts or omissions, whether actual or alleged,” American Home 

; Pope had alleged only negligence, and the parties conceded for the purposes
of appeal in American Home I that American Home had a duty to defend Dr. Strnad
unless her allegations on their face were subject to a policy exclusion. The district
court found that the policy exclusion for criminal acts applied. Because the district
court believed that all of Pope’s claims for relief arose out of Dr. Strnad’s criminal
failure to warn social-services officials, it implicitly ruled that American Home had
no duty to defend the claims against Dr. Strnad, and therefore had no duty to
indemnify his estate.

       Thus, the question before this court in American Home I was whether Pope’s
allegations raised any claims that could be subject to coverage under the policy. We
answered that question affirmatively. This answer precluded summary judgment in
favor of American Home on the issue of whether it had a duty to defend Dr. Strnad
and opened the possibility that Dr. Strnad’s estate was entitled to indemnification.
The parties conceded for the purposes of that appeal that the allegations in Pope’s
complaint fell within the policy’s definition of a “wrongful act,” 

coverage applied unless all of Pope’s theories of relief were barred by one or more
specific policy exclusions. On this question, we concluded that “American Home . . .
failed to demonstrate that a policy exclusion applied” to Kelly’s “separate claim
regarding Dr. Strnad’s failure to warn Kelly or her mother, who was in a position to
protect her daughter from further abuse.” 

(emphasis added). We did not
address whether that particular “separate claim” (or some other claim not subject to
the criminal act exclusion) was valid for the purpose of the duty to indemnify,
however, because no fact-finding body had ever considered the question of whether
that claim or other claims were causally linked to Kelly’s alleged damages. Indeed,
American Home I anticipated a determination of these facts on remand, noting that
“evidence of Dr. Strnad’s actions relating to the failure to warn Kelly or her mother
of Lester’s future dangerousness could be admissible” in such a proceeding. 

n.8.


                                        -14-
       Kelly Pope and Buckley argue (and the district court agreed) that because the
opinion in American Home I uses the word “coverage” rather than “potential
coverage” or “duty to defend,” this court must have ruled conclusively on both the
duty-to-defend and duty-to-indemnify issues. Both the holding of that case and its
posture at the time it was before this court preclude that interpretation of the opinion.
As the above analysis shows, we did not conclusively decide the indemnification issue
in favor of Pope and Buckley. We merely reversed the grant of summary judgment
in favor of American Home and remanded for further proceedings, namely
proceedings to determine what role, if any, Dr. Strnad’s failure to inform a person or
entity to whom he owed a common-law (but not a statutory) duty to warn of the
danger to Pope—such as Pope’s mother—played in causing Pope’s injuries. The
district court erred in concluding that American Home I required a grant of summary
judgment against American Home on the issue of indemnification.




      B. Collateral Estoppel

        Even if the district court erred in its rationale for granting summary judgment,
we may affirm if the district court would have reached the same result had it applied
different, valid grounds. U.S. Gypsum Co. v. Greif Bros. Cooperage Corp., 

, 262 (8th Cir. 1968). In this case, Pope and Buckley argue that the district court
could have reached the same result by applying collateral estoppel. Specifically, they
argue that the jury verdict against Dr. Ray and the arbitration-panel decision against
Dr. Strnad collaterally estop American Home from contesting the issue of Dr. Strnad’s
breach of the common-law duty to warn. In essence, they contend that a fact-finding
proceeding before the district court was unnecessary because it would have merely re-
litigated the same facts at issue in the state proceedings.

       In diversity cases, we grant state-court judgments the same preclusive effect
that they would receive in the forum state. Ewing v. St. Louis-Clayton Orthopedic

                                          -15-
Group, Inc., 

, 685 (8th Cir. 1986). In determining whether to apply
collateral estoppel, Missouri courts consider four factors:

      (1) whether the issue decided in the prior adjudication was identical to the
      issue presented in the present action; (2) whether the prior adjudication
      resulted in a judgment on the merits; (3) whether the party against whom
      estoppel is asserted was a party or was in privity with a party to the prior
      adjudication; and (4) whether the party against whom collateral estoppel
      is asserted had a full and fair opportunity to litigate the issue in the prior
      suit.

James v. Paul, 

, 682 (Mo. 2001) (en banc).

      The parties raise a number of arguments relating to the last three factors,
particularly whether American Home had a full and fair opportunity to litigate in the
Strnad arbitration proceeding. We need not reach those questions here, however,
because the first factor alone is dispositive. At no time in the lengthy procedural
history of this dispute has any adjudicative body addressed the precise issue relevant
to this case: whether, and to what extent, Pope’s damages arose from Dr. Strnad’s
failure to warn someone other than Missouri Division of Family Services officials.
In Ray’s jury trial, the instructions show that the jury answered only whether Dr.
Strnad breached his common-law duty to warn, and whether Dr. Ray could be held
vicariously liable for that breach. In the arbitration proceeding governing Dr.
Strnad’s liability, the panel similarly only considered whether Dr. Strnad breached
his common-law duty to warn. Missouri’s definition of the common-law failure to
warn encompasses the failure to warn “the intended victim” or “those likely to warn
the victim including notifying appropriate enforcement authorities.” 

. This could encompass a failure to warn any number of individuals,
including the social-services officials to whom Strnad was statutorily required to
report under threat of criminal sanction. It therefore could also constitute a number
of separate, discrete “wrongful acts” within the language of the policy, several of



                                          -16-
which were raised in Pope’s complaint and only one of which is subject to a policy
exclusion on its face.

      In short, the adjudicative bodies in both the Ray trial and the Strnad arbitration
proceeding could have found that Strnad was negligent only in his failure to warn
officials within the Missouri Division of Family Services, or that the failure to warn
those officials was the only negligent omission to cause damages to Pope, or that
some portion of the damages was solely attributable to the failure to warn those
officials. We cannot know if the fact-finding bodies took any of these courses,4 but
to the extent they did, at least part of the claim for indemnification could be barred
by the criminal-act exclusion in the insurance policy.

      Therefore, we reverse the grant of summary judgment for Buckley and Pope as
to Count I of American Home’s amended complaint and remand to the district court
for a factual determination of whether, and to what extent, Strnad’s failure to warn
Pope, her mother, or some person or entity other than the Missouri Division of
Family Services caused Pope’s injuries.

     On remand, American Home may also seek to prove that the “knowingly
wrongful” policy exclusion applies to the claim for indemnification. As noted earlier,
American Home’s duty to defend was the only issue before this court in American
Home I, and the “knowingly wrongful” exclusion did not apply in that context
because Pope alleged only negligence and her allegations, on their face, were not
subject to the exclusion. Those allegations, however, are relevant only to the duty
defend; determination of a duty to indemnify “must await the facts.” Superior


      4
        Pope is at least partly to blame for this fact, given that her agreement with
Donna Strnad not to seek recovery against Strnad’s estate included a provision
governing the arbitration proceedings whereby “the arbitrators need not provide any
kind of basis for the ruling other than whether or not their finding was based upon
negligence and the amount of damages.”

                                         -17-
Equip. 

. Thus, the law-of-the-case doctrine does not apply to
the question of whether Strnad committed a wrongful act “with knowledge that it was
a wrongful act” within the language of the policy exclusion.

     C. Summary Judgment as to Count II

      On appeal, American Home does not appear to make any specific arguments
with regard to the propriety of summary judgment upon Count II of its amended
complaint, in which it claimed that Strnad’s behavior was not a “wrongful act” within
the language of the policy. Even assuming American Home preserved this issue on
appeal, however, we affirm the district court’s grant of summary judgment in favor
of Pope and Buckley as to Count II. The policy defines a “wrongful act” as “any
actual or alleged negligent act, error, or omission” (emphasis added). Pope alleged
that Dr. Strnad had negligently failed to warn of the danger to Pope. Because the
policy defines “wrongful act” to include mere allegations of negligence—regardless
of whether the insured actually intended harm or knew that his conduct was
wrongful—no further fact-finding is necessary to conclude that Dr. Strnad’s behavior
was a “wrongful act” as defined by the policy.

      To summarize, we reverse the grant of summary judgment against American
Home as to Count I of American Home’s amended complaint and affirm the grant of
summary judgment as to Count II. On remand, the district court has two
considerations with regard to Count I. First, it must consider whether Dr. Strnad’s
commission of “wrongful act(s)” in failing to warn some person or entity other than
the Missouri Division of Family Services was knowingly wrongful. Second, if the
district court determines that Dr. Strnad’s conduct was not knowingly wrongful, the
district court must determine whether, and to what extent, Dr. Strnad’s failure to warn
some person or entity other than the Missouri Division of Family Services gave rise
to Pope’s damages.



                                        -18-
III. DISMISSAL WITHOUT PREJUDICE OF COUNTS III THROUGH VI
OF AMERICAN HOME’S COMPLAINT AND POPE’S EQUITABLE
GARNISHMENT COUNTERCLAIM

      American Home also argues that the district court erred in dismissing without
prejudice Counts III through VI of its complaint, as well as ruling that Kelly Pope’s
equitable garnishment counterclaim was permissive and could be re-filed in state
court. We address these issues in turn.

      A. Counts III through VI of American Home’s Amended Complaint

      We begin with the district court’s dismissal of Counts III through VI of
American Home’s amended complaint. American Home added these counts after
American Home I and after the entry of the state trial court’s judgment awarding
damages from the Ray verdict and the Strnad arbitration hearing. The district court
did not use the term “abstention” or apply a detailed analysis of its suitability in this
situation, but that rationale for dismissal is clear from the language of its opinion,
namely its holding that “these issues . . . should be raised in the state court litigation”
involving the Ray-Strnad combined judgment.

      We review a district court’s decision to stay or dismiss declaratory-judgment
claims for abuse of discretion. Scottdale Ins. Co. v. Detco Indus., Inc., 

,
996 (8th Cir. 2005). The state proceedings at issue here were not parallel to the
federal proceedings; the state proceedings were related to the liability of Drs. Ray and
Strnad and did not directly address the details of American Home’s obligations under
the insurance policy. Further, American Home was not a party to the state
proceedings. Therefore this court analyzes the exercise of abstention by applying the
six-factor test we adopted in Scottsdale:

       [T]he relevant factors to consider are: (1) whether the declaratory
       judgment sought will serve a useful purpose in clarifying and settling

                                          -19-
      the legal relations at issue; (2) whether the declaratory judgment will
      terminate and afford relief from the uncertainty, insecurity, and
      controversy giving rise to the federal proceeding; (3) the strength of the
      state’s interest in having the issues raised in the federal declaratory
      judgment action decided in the state courts; (4) whether the issues raised
      in the federal action can more efficiently be resolved in the court in
      which the state action is pending; (5) whether permitting the federal
      action to go forward would result in unnecessary entanglement between
      the federal and state court systems, because of the presence of
      overlapping issues of fact or law; and (6) whether the declaratory
      judgment action is being used merely as a device for procedural
      fencing—that is, to provide another forum in a race for res judicata or
      to achieve a federal hearing in a case otherwise not removable.

(quotations and alterations omitted); see also 

(adopting that test
in this circuit).

      Applying that test to the claims at issue, we find that the district court did not
abuse its discretion in dismissing Counts III through VI of American Home’s
complaint without prejudice. Missouri has a strong interest in these claims because
they entail a determination of the validity and limitations upon the execution of a
state-court judgment arising out of a state-court verdict and a state arbitration
proceeding. These claims also require the application of only state law, and some of
the counts at issue here (namely Counts III and V) raise sensitive issues of Missouri
statutory interpretation, thus adding to the state interest in the case.

      As to efficiency, we note that both parties’ choices throughout the history of
this case have already led to extensive inefficiency in both state and federal courts.
Keeping the counts at issue in federal court, however, would only add to that
inefficiency. Assuming that the district court acted within its discretion in dismissing
Pope’s equitable garnishment counterclaim, a question we consider below, then it
would be far more efficient for American Home to raise all of its defenses seeking
to limit its liability under that judgment in the same proceeding where Pope seeks to

                                         -20-
collect upon it. Indeed, she has already filed a state action for equitable garnishment,
and American Home is free to raise such defenses there. See Butters v. City of
Independence, 

, 425 (Mo. 1974) (allowing an insurer, on facts similar
to the case at hand, to raise defenses relating to the duty and extent of indemnification
in a plaintiff’s action for equitable garnishment).

       Retaining Counts III through VI in federal court also holds the potential to
entangle issues of fact and law between the state and federal courts even more than
they are already. Without those claims, the task of the district court is limited to
evaluating the facts in light of the language concerning policy exceptions; the task
of the state courts is limited to determining the enforceability of the state-court
judgment, including such matters as its size and validity. The case has been through
multiple cycles of appeal in the state courts on various issues—the size of the
damages awarded to Pope among them—and it is reasonable to assume that those
courts have a closer connection to both the facts and law relevant to their role in the
litigation.

       The two remaining Scottsdale factors relevant to this case appear to weigh
against abstention, but only slightly. Resolving all of American Home’s defenses to
full indemnification in one proceeding would seem to create some certainty and
establish what amount, if any, Pope could legally recover as to her claim against Dr.
Strnad. But because the claim against Dr. Strnad (as well as some of American
Home’s defenses) is linked to the case against Dr. Ray, and that case has yet to reach
its final resolution in the state courts, any certainty to be gained by ruling on Counts
III through VI here could be fleeting. Much more certainty, finality, and efficiency
would come from waiting for final judgment in the Ray case, after which time a state
court could hear all of American Home’s defenses to full indemnification and all of
Pope’s arguments for enforcing the Ray and Strnad judgments.5

      5
        It appears the parties have already begun to take this course. Pope filed her
equitable garnishment claim against in state court shortly after the district court

                                         -21-
      B. Equitable Garnishment Counterclaim

       We deal next with the dismissal of Pope’s equitable garnishment counterclaim.
In its initial order, the district court appears to have dismissed the claim under the
abstention doctrine, stating that “[t]his issue is not properly before this court.” Pope
moved to clarify the ruling, and the district court responded by adding that the
dismissal was without prejudice and stating that “[t]he issues raised by Kelly Pope’s
equitable garnishment claim are properly raised in the state court litigation.”

       The basis for American Home’s appeal of this issue does not arise out of the
dismissal itself, but rather certain language within the district court’s order following
Pope’s motion to clarify the ruling. Pope, concerned that she could be barred from
re-filing the equitable garnishment claim in state court, sought reassurance from the
district court that her equitable garnishment counterclaim was not a compulsory
counterclaim in the federal declaratory judgment action. The district court provided
that reassurance, ruling that “it appears . . . [the] equitable garnishment action would
not be considered a compulsory counterclaim” and she would not be barred from
bringing it in state court.

      As noted above, we believe the district court ultimately dismissed the
counterclaim on the basis of abstention and not as a discretionary refusal to hear a
permissive counterclaim. As such, the district court’s additional statement that
Pope’s counterclaim was not compulsory was superfluous, because the common-law
doctrine of abstention is not subservient to Rule 13 of the Federal Rules of Civil
Procedure. The compulsory-permissive distinction of Rule 13 does not limit a
district court’s power to abstain in a given case. After all, we can imagine a situation
in which there are cases involving several claims between the same parties in two


dismissed it without prejudice. Presumably, American Home will assert Counts III
through VI of its amended federal complaint, which were dismissed without prejudice
in the federal proceeding, as affirmative defenses in the state proceeding.

                                         -22-
different courts, and one or more overlapping counterclaims are compulsory within
the meaning of Rule 13(a) in each case. We would not say that one of those courts
abused its discretion in dismissing those overlapping counterclaims to allow them to
proceed in the other court merely because they fit the Rule 13(a) definition of
compulsory.6

      We believe the district court ultimately dismissed the counterclaim for the same
reason it dismissed Counts III through VI of American Home’s amended complaint:
it was an appropriate issue for abstention in deference to the state-court litigation.
The same rationale for abstention with regard to related counts of American Home’s
amended complaint applies with equal force to Pope’s equitable garnishment
counterclaim. Therefore, we do not find that the district court abused its discretion
in dismissing Pope’s equitable garnishment counterclaim without prejudice to allow
her to raise it in state-court proceedings.




      6
        Even if the compulsory-permissive distinction were relevant in this case, we
note that the equitable garnishment counterclaim was not compulsory under Rule 13
and the district court had the authority to dismiss it on that basis. Assuming the
validity of American Home’s argument that its claims for non-coverage under an
insurance policy and Pope’s counterclaim to collect a judgment on the basis of that
policy arise under the same “transaction or occurrence,” Fed. R. Civ. P. 13(a), the
counterclaim satisfies an exception to the compulsory-counterclaim rule implicated
by the district court’s statement in the original dismissal that “[t]his issue is not
properly before this court.” Rule 13(e) states that parties must receive the permission
of the court to present a counterclaim “which either matured or was acquired by the
pleader after serving a pleading”; such claims are, by the terms of Rule 13(e),
permissive. Stone v. Dep’t of Aviation, 

, 1280-81 (10th Cir. 2006).
Pope’s claim did not mature until almost two years after she filed her original answer
in the case, and there is no evidence in the record that she received permission of the
court to add this now-mature counterclaim when filing her answer to American
Home’s later amended complaint. Thus, the district court had the power to dismiss
the counterclaim as not properly before the court.

                                         -23-
IV. DISMISSAL OF BUCKLEY’S COUNTERCLAIMS

      Buckley appeals the district court’s dismissal of his counterclaims against
American Home for bad faith, negligent claims handling, and breach of fiduciary
duty. The district court found that Buckley’s status as a defendant ad litem gave him
no right to bring tort claims against American Home. On appeal, Buckley argues that
he should have the authority to bring such claims, either on Dr. Strnad’s behalf or in
his own capacity. We review dismissals for failure to state a claim upon which relief
can be granted de novo. Stahl v. U.S. Dep’t of Agric., 

, 700 (8th Cir.
2003).

      To determine whether Buckley had the legal right to make such claims, we must
examine the place of defendants ad litem under Missouri law and their distinction
from personal representatives. In Missouri, causes of action survive an injured
party’s death and may be brought by that party’s personal representative, as
appointed by the probate court. Mo. Rev. Stat. § 537.020. Similarly, injured parties
may maintain a cause of action against deceased parties. Mo. Rev. Stat.
§ 537.021.1(2). If a deceased tortfeasor is insured and the injured party seeks
recovery from the insurer only, the court will appoint a defendant ad litem for the
deceased. 

other hand, if the deceased tortfeasor is uninsured, or if the
injured party wishes to recover any part of a judgment from the assets of his estate
rather than the insurance policy, the court will appoint a personal representative to
stand in place of the deceased in the proceedings. 

seems
relatively simple: the court appoints a personal representative whenever the assets of
the estate are potentially involved, and a defendant ad litem whenever the sole assets
involved are those of the deceased’s insurer. See In re Estate of Hayden, 

, 32 (Mo. Ct. App. 1992).

      If defendants ad litem were given the authority to sue for tort claims on behalf
of the estate, as Buckley contends, it would render the state-law distinction between
defendants ad litem and personal representatives meaningless. Missouri makes this

                                        -24-
distinction because “the ‘real defendant’ [in suits against a defendant ad litem] is the
liability insurer.” Atlanta Cas. Co. v. Stephens, 

, 333 (Mo. Ct. App.
1992). By asserting his counterclaims, Buckley is attempting to expand the limited
scope of his status as defendant ad litem by asserting independent claims that belong
to the estate, of which he is not the personal representative under Missouri law.

      Buckley’s second ground for asserting the counterclaims—that he is entitled to
bring them on his own behalf because he “acquired” them from Dr. Strnad’s estate
when he was appointed defendant ad litem—fails for many of the same reasons.
Buckley never faced any personal liability for the actions of Dr. Strnad, was never
a party to the insurance contract, and has not been injured by any act or omission of
the insurer. Any tort claims arising from American Home’s contractual relationship
with Dr. Strnad belong to his estate, which could seek to appoint a personal
representative to bring such claims. See Truck Ins. Exch. v. Prairie Framing, LLC,

, 93-94 (Mo. Ct. App. 2005). Therefore, we agree with the district
court that Buckley’s appointment as defendant ad litem gave him no authority to
bring these counterclaims.

V. ATTORNEY FEES

      Because Buckley and Pope are no longer prevailing parties in this action, and
because the district court did not base its award of attorney fees upon a finding of
bad-faith conduct by American Home during the course of litigation, we vacate the
award of attorney fees. We recognize that this issue may arise again on remand,
however, and, for the sake of judicial economy, we wish to add a few statements of
clarification on this question.

      As the district court noted in its order, Missouri law allows a court to award
attorney fees to a prevailing party in a declaratory judgment action, but only if the
party can show that the circumstances meet one of the “few exceptions” to the
American Rule regarding fees. David Ranken, Jr. Tech. Inst. v. Boykins, 816 S.W.2d

                                         -25-
189, 193 (Mo. 1991) (en banc), overruled in part on other grounds by Alumax Foils,
Inc. v. City of St. Louis, 

(Mo. 1997) (en banc). These exceptions
include situations (1) “where the natural and proximate result of a breach of duty is
to involve the wronged party in collateral litigation,” 

that is, litigation
resulting from the breach that is distinct from the suit to prove the breach itself, Mo.
Prop. & Cas. Ins. Guar. Ass’n v. Pott Indus., 

, 306 (Mo. 1998) (en
banc); (2) where the court finds a need to “balance benefits” of litigation, 66, Inc. v.
Crestwood Commons Redev. Corp., 

, 594 (Mo. Ct. App. 2003),
which applies when the benefits of the litigation inure to a discrete group of non-
party beneficiaries or the public at large and “the nature of the lawsuit” is such that
it is of an “unusual type[]” or “extremely complicated litigation is involved,” Gurley
v. Montgomery First Nat’l Bank, N.A., 

, 871 (Mo. Ct. App. 2005)
(quotation omitted); and perhaps (3) when the declaratory-judgment plaintiff’s claim
is clearly baseless under published case law. 

(“Given the rights of the parties, the amount of financial interest involved in the case,
and [the] lack of standing for [the insurer] to bring this action as evidenced by
published case authority, we cannot conclude that the trial court abused its discretion
[in awarding fees].”).7

       To the extent that dicta in Ledbetter or other Missouri Court of Appeals cases
suggest a more general power to award fees outside the exceptions as defined above,
that language conflicts with the Supreme Court of Missouri’s clear statements of law
regarding the need for a recognized exception to the American Rule to apply before
a court can award attorney fees in a declaratory judgment action. See Pott Indus.,

      7
       Missouri courts also recognize an exception to the American Rule where one
party engages in “intentional misconduct” during the course of litigation. Volk Const.
Co. v. Wilmescherr Drusch Roofing Co., 

, 901 (Mo. Ct. App. 2001).
This exception is not relevant here, because had the district court found that American
Home engaged in bad-faith conduct during the course of litigation, it may have been
able to assess fees based upon its inherent power as a federal court. Chambers v.
NASCO, Inc., 

, 52-55 (1991). There was no such finding in this case.

                                         

; David Ranken, Jr. Tech. 

. When such
a conflict arises in a diversity case, the substantive law of a state “declared by its
Legislature in a statute or by its highest court in a decision” controls. Erie R.R. Co.
v. Tompkins, 

, 78 (1938). Therefore, if Pope and Buckley prevail on
remand, they may recover their attorney fees under state law only if the district court
finds that one of Missouri’s exceptions to the American Rule applies in this case.

VI. CONCLUSION

      For the foregoing reasons, we affirm the judgment of the district court with
respect to its dismissal of Buckley’s counterclaims, Pope’s counterclaim, and Counts
III through VI of American Home’s amended complaint, as well as its grant of
summary judgment as to Count II of American Home’s amended complaint. We
reverse the judgment of the district court with respect to Count I of American Home’s
amended complaint, vacate the award of attorney fees, and remand for a proceeding
to determine whether and to what extent the policy exclusions for criminal and
knowingly wrongful conduct apply to the facts at issue. Specifically, the district
court should determine: (1) whether the facts show that Dr. Strnad’s failure to warn
some person or entity other than the Missouri Division of Family Services was
knowingly wrongful within the language of the policy exclusion; and (2) if not,
whether Strnad’s failure to warn some person or entity other than the Missouri
Division of Family Services gave rise to some or all of Pope’s damages.
                         ______________________________




                                        -27-