How Covington won $500 ml case of shipwrecked Spanish frigate

September 22, 2011

In a way, it’s a shame that James Goold of Covington & Burling isn’t a historical novelist.

He’s come up with some great fodder, like the story of Captain Diego de Alvear. In 1804, as Spain girded for war with England in the ever-shifting enmities of the Napoleonic era, Spain assembled a four-ship squadron to transport gold and silver from Peru, then a Spanish territory, to Spanish coffers. At the last minute, the second-in-command of one of the ships, the Medea, fell ill, so de Alvear was transferred to the Medea from another ship, the Mercedes. The rest of his large family — his wife, three sons, four daughters, and a nephew — stayed aboard the Mercedes as the ships sailed from South America to Spain. One day before the squadron was due to reach port in Cadiz, the British Navy intercepted the ships. The Spanish Navy refused to surrender, touching off what became known as the Battle of Cape Saint Mary, a pivotal moment in the history of the Spanish Empire. As de Alvear watched from the Medea, British artillery struck the Mercedes. The ship exploded. De Alvear’s entire family disappeared, along with scores of Spanish sailors, chests of treasure, and two ancient bronze cannons, destined to be melted down and recast as modern weapons.

Of course, Goold would never have come across the tragic story of Diego de Alvear if it weren’t for his real job. The Covington counsel has carved out one of the most interesting microniches I’ve ever run across: he represents foreign sovereigns in disputes with commercial treasure hunters over the rights to shipwreck recoveries. On Wednesday the U.S. Court of Appeals for the Eleventh Circuit, in a 53-page opinion that cites the de Alvear story, ruled that the Foreign Sovereign Immunity Act bars U.S. courts from hearing a case involving rights to treasure that a company called Odyssey Marine Exploration recovered from the site of the 1804 Mercedes explosion. The three-judge appellate panel didn’t decide who owns the treasure — which Odyssey has estimated to be worth $500 million — but the ruling in effect grants it to Spain, since the court ordered the booty to be transferred to Spanish custody.

This is the third time Goold has won such a ruling for a foreign sovereign. (He told me that in several other cases, treasure hunters backed off claims before courts reached a decision.) Even with that history, though, the Mercedes investigation was particularly thrilling. According to Goold, Odyssey was very secretive about its excavation of the site, in an operation it code-named “Black Swan.” Through international military and diplomatic sources, Spain (and Covington) learned that the Black Swan operation was taking place in the waters off Gibraltar, where the Mercedes went down, and that Odyssey had transported a Gulfstream filled with gold and a Boeing 757 filled with silver to Florida.

Odyssey insisted it didn’t know what ship was the source of the treasure, since no vessel was recovered. Spain, which suspected Odyssey had found the Mercedes wreckages, was able to obtain Gibraltar’s records of what the treasure hunter recovered from the sea bed. Covington also found the ship’s manifest Mercedes had filed in Montevideo, Uruguay, the ship’s last port before it blew up. The manifest cited the two ancient bronze cannons Mercedes was carrying back to Spain — one of which Odyssey had recovered from the site. That and other evidence, such as the dates on the coins Odyssey recovered, led Spain to conclude that Odyssey was pulling up wreckage from the Mercedes explosion.

Goold told me that Spain regarded Odyssey’s excavation as an affront to its history, as if a foreign commercial venture were recovering treasure from ships destroyed in Pearl Harbor. Odyssey had filed an admiralty action in federal district court in Florida to win rights to the treasure. Spain entered to challenge the court’s jurisdiction under foreign sovereign immunity. (The litigation also attracted claims by Peru, which asserted that because the treasure came from Peruvian land it should be awarded to Peru; and descendants of private Spanish citizens, who asserted that the Mercedes was carrying their ancestors’ private property.)

Goold said Spain opted for the jurisdictional challenge, rather than a battle over actual ownership, because FSIA claims receive an expedited hearing. He and a Covington team hunkered down in Madrid — in a reconstructed 19th-century frigate captain’s quarters in the naval archives — to prove that Odyssey’s treasure came from the Mercedes, and that the Mercedes was acting as a warship. According to the Eleventh Circuit opinion, written by Judge Susan Black for a panel that also included Judge Frank Hull and Judge Walter Stapleton of the Third Circuit, Spain and Odyssey submitted 125 exhibits between them on the question of the ship’s identity, including reams of historians’ affidavits and original Spanish documents. That evidence persuaded the district court that the wreckage belonged to the Mercedes. The court subsequently ruled that Foreign Sovereign Immunity applied to the case, because the treasure came from a Spanish warship.

Odyssey’s general counsel, Melinda MacConnel, raised some intriguing arguments in the Eleventh Circuit appeal. She asserted that much of the treasure recovered from the site belonged not to Spain, but to private citizens who paid the Spanish Navy to transport their property. That private property, she said, isn’t covered by foreign sovereign immunity. Moreover, she argued, FSIA comes into play when there’s a shipwreck. No wreckage of the actual Mercedes vessel, which exploded at the surface, has been found. Finally, MacConnel argued that the FSIA only bars litigation when the goods at issue are in the possession of the foreign sovereign; Spain didn’t physically possess the Odyssey-recovered treasure, so it couldn’t claim immunity from litigation.

The Eleventh Circuit disagreed, finding that the district court correctly concluded that the FSIA means U.S. courts don’t have jurisdiction. Goold said that Odyssey could try to sue to recover the treasure in Spanish courts, but he doesn’t think it stands much of a chance.

MacConnel told me Odyssey intends to ask for en banc review of the appellate ruling, focusing on the possession and private property arguments. “This ruling gives foreign sovereigns greater power than the U.S.,” she said. She said she expects the Peruvians and descendants to join the request for review.

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