What Is a Custodian? A Broad Explanation
In a general legal context, a custodian is a trustee or a person’s next of kin. It’s a basic legal term also used in some more specific ways. For example, some businesses may refer to themselves with this word as part of an overall business name, or as a descriptive term (i.e., "we are a data custodian"). A custodian is basically a person or organization that is charged with the safekeeping of something.
A custodian is different from a conservator in that a conservator’s role is more about protection than ownership. While a custodian simply manages and maintains , to some extent, the items placed under its care and direction. A conservator often has a more vested interest in the items in question and often has a legal claim or title to them.
These definitions and roles of custodians may have slight variations depending on the field of law and the general context – whether in finance, real estate, environmental, or other professional legal matters.
Legal Custodians: Varieties and Classes
In the financial world, a custodian or financial custodian is a financial institution that holds customers’ securities for safekeeping, with account records evidencing ownership and balance. The term is also applied more broadly to account custodians, those who provide recordkeeping but leave security up to the individual account holder. In the case of investment accounts, custodians are responsible for managing the assets of an account, but do not manage the assets themselves. Custodians may charge fees for providing the service of managing accounts, including the fee for recordkeeping.
The term custodian is also used in the context of divorce and child custody cases. A person or organization that cares for a minor child has certain responsibilities towards the child, as does a person who has possession of a thing for the benefit of another.
Certain states combine these definitions by defining custodian as those who obtain mail, check mail receive money or property for others. A custodian in the sense of physical care of property, real or personal, in the context of a divorce and child custody proceeding is essentially a caregiver.
A legal custodian is defined by state statute as the person in control of a minor child but who does not have legal custody of that child. There are various types of legal custodians, ranging from the custodian of an estate, such as a trustee, to the custodian of property in the context of a bankruptcy case, to the custodian of a person, such as a legal guardian.
The U.S. legal system also generally recognizes a sub-category of legal custodians known as conservators. The concept of conservators is similar to the concept of trustees, in that both are established to administer a trust or estate. In the context of trusts, which are arrangements for the holding and management of money, either of two entities may be appointed to act as the custodian of assets – a trustee or a private custodian.
What Custodians Do: Legal Functions
The role of a legal custodian is a critical one, with duties usually being defined by statute or judicial order. Typical responsibilities include ensuring the safekeeping of documents vital to a judicial proceeding, such as records, files and other forms of evidence. A legal custodian may also be responsible for producing records that have been subpoenaed by the court — as was the case in a May 2017 case before the 1st DCA, which determined the risk involved when a legal custodian does not properly fulfill this responsibility in a custodial inquiry, as the latter discovered in Maine Dep’t of Health & Human Servs. Case No. 17-698 (Fla. 1st DCA 2017). There, the custodian was held in contempt for not disclosing confidential information.
Another major responsibility of the custodian is to cooperate with the parties involved in a proceeding so that documents, particularly emergency medical documents (EMDs) are produced in a timely manner. In J.C. v. Dep’t of Children and Families, 99 So.3d 567 (Fla. 5th DCA 2012), the Fifth DCA began discussion about the general liability of custodians who do not properly safeguard confidential EMD records. The court concluded that a legal custodian of EMDs has absolute liability for their loss. This assertion was later upheld in A.C. v. Dep’t of Children and Families, 141 So.3d 675 (Fla. 5th DCA 2014). In the latter case, the Fifth District Court of Appeal found that where the custodian failed to protect the minor from harm, there was civil liability. Here, the custodian lost custody of the child after failing to produce medical records, leading to a preventable stroke. In another family law case, Ransome v. Michalowski, 24 So. 3d 672 (Fla. 4th DCA 2010), the custodian was given an opportunity to comply with production orders following the initial sanctions – and failure to do so again resulted in additional sanctions.
Aside from adhering to statutory or court order obligations, a legal custodian’s duties extend to preserving evidence, particularly in an equitable distribution hearing. Mazur v. Mazur, 113 So.3d 88, 90 (Fla. 4th DCA 2013). The Second DCA also ruled that "an ex-wife may seek equitable distribution of a former husband’s pension benefits" that were not previously disclosed by his pension custodian. McGann v. McGann, 612 So.2d 733, 735 (Fla. 2d DCA 1993). Clearly, custodians who might use Section 61.075 to avoid discovery obligations are exposing themselves to liability.
What It Means Legally to Be a Custodian
Custodianship requires more than just "looking after property." Such a basic role involves a variety of legal requirements and standards governing it. If a party qualifies as a "custodian" of information, then there are certain obligations he or she must fulfill. There are also standards controlling how a custodian should act.
In reviewing and evaluating a potential custodian’s electronic data to be produced during litigation in a legal hold strategy, ensure that the above mentioned factors are considered. One of the most important factors governing the role of a custodian is the what is known as the duty to preserve. The duty to preserve requires that upon a reasonable anticipation of litigation, that the parties, and therefore, custodians, take reasonable efforts to ensure that any potentially relevant electronically stored information is preserved.
What this means is that the custodian, on their own volition, must take certain steps to ensure that their data is not destroyed. Vinyl Holdings, Inc. v. Pitney Bowes, Inc., 2010 WL 2483836, at *8 (N.D. Ala. June 7, 2010)(citing American Elec. Power Serv. v. Grant Wilfley Assocs., 2009 WL 2365647, at *1(N.D. Ind. July 31, 2009)). An example would be if an attorney tells a witness to maintain and not delete emails about a particular incident. The same will apply to custodians as well. In Pitney, the custodians had put forth a "litigation hold," but they failed to adhere to it past a certain period of time, which resulted in considerable discovery issues in their case. All custodians should be aware of their responsibility to preserve as soon as litigation is anticipated.
Because custodians are so vital to e-discovery efforts, any failure to comply with their duty to preserve can result in severe consequences. What happens if there is a failure to preserve? Well, "a rule 37(e) sanction for spoliation tells the jury ‘all the information would cause prejudice to the moving party.’" Property I.S. Holding Corp v. A & B Assoc., 152 F.3d 318, 321-22 (4th Cir. 1998); see also Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 429-30 (6th Cir. 2007).
As custodians play such a huge role in the preservation of evidence, lawyers should educate their custodial witnesses about their preservation duties when it comes to ESI. This means providing instructions on how to search for potentially responsive ESI, including extending a litigation hold if the relevant time period is extended, providing basic training about ESI issues, and possibly even hiring a consultant to monitor their compliance with e-discovery efforts.
If custodians breach the responsibility to preserve in any way, parties are encouraged to bring it up early on in the litigation to prevent any unfairness to the opposing party (in line with the preservation standard mentioned above) and to minimize discovery disputes.
How a Legal Guardian Compares and Contrasts with a Custodian
When you’ve decided to leave property or assets to a minor, as part of a will or a trust, it is critical that you select the right person to manage those assets. A guardian is an individual who takes on the responsibility of raising the child when there are no parents available to care for the child. A custodian is the role involved with managing property or assets on behalf of a minor child until that child is old enough to manage his own property. Of course, there is a great deal of intersection between these two roles.
For example, in a guardianship, the guardian is technically responsible for all of the care and assets of the child. Depending on the age of the child, legal guardianship can cover all aspects of the child’s life, including educating him, offering him medical treatment, taking a position on whether a teenager should be allowed to drive and so on. In a custodianship, the custodian is only responsible for the property or assets. Everything else about the child’s life remains the duty of the parents or other legal guardians, if any are available. Still, the custodian has significant power over the minor’s interests in those assets , the income related to those assets and how the assets are used.
Because a custodian only has power over the child’s assets—and actual guardianship of the minor remains with the parents or legal guardians (if any)—legal guardianship decisions are typically evaluated across a wider range of factors than those of custodianship. The most important factors for a child’s guardian will include the ability to provide proper care for the child, the willingness to assume the role of guardian, familiarity with the child’s needs and past attachments to the child. On the other hand, custodianship evaluations are typically concerned primarily with the custodian’s ability to responsibly maintain care of the assets, school trusts and the child’s general welfare.
The legal requirements for guardianship or custodianship vary from one state to the next. Many states have all-encompassing guardianship applications, which combine the separate needs of legal guardians, custodians and conservators for an aging or disabled individual in one place. Custodianship applications are usually significantly narrower. Furthermore, most states have certainly defined age limits (usually 18 years old) for terminating someone’s role as a custodian and shifting property management power over to the child.
Custodian Examples: Real-World Scenarios
In the real estate business, a custodian of real property means any person holding legal title to the property. The custodian has two responsibilities: (i) to protect the property during the time of custody for the benefit of the entitled owner and (ii) to account for the rents and profits derived from the possession and use of the property.
Here are a few examples:
Example 1: The Tagger Group acquisition and purchase agreements required Michael, Director of The Tagger Group to act as custodian of certain properties where The Tagger Group purchased notes secured by the properties. The custody function entailed documents being sent to Michael and used by him as the basis for processing transactions and tracking the payments received.
Example 2: Example 3: SouthOak Capital purchased numerous Texas defaulted notes and acquired the right to foreclose on the underlying properties. For each property, SouthOak Capital appointed Allmand Law’s foreclosure attorney as its custodian with the right to send notices on its behalf.
Legal Issues and Controversies Regarding Custodians
In the realm of electronic discovery, the role of a custodian is central. A custodian is generally defined as the individual in possession, custody, or control of electronically stored information (ESI). What this means, in practical terms, is the custodian is the person the company or individual identifies for the purposes of producing its documents in response to a request from another party, often through a subpoena or other demand for information. Although it might seem like custodians play a purely administrative role, their effect on discovery, and therefore the larger litigation, can be immense.
The legal challenges and issues faced by custodians largely stem from the descriptive nature of the term: custodian. While custodians hold information for the production of electronic records, the information they hold may not always belong to them. For example, if an employee accesses R&D data on a personal device at 2 a.m., the information is on that device and is in the employee’s possession, custody, and control. However, the information does not belong to the employee. Ex-employees are often sued because of the company information they have in their possession simply from looking at their devices.
Further complicating the legal status of custodians is the vagueness of the term "control." Last November, attorney Justin Smulison wrote a thorough post on the issue of ESI in a remote location – a law firm’s computer, for example. In that post, he covered a case where a New Jersey judge ruled that a defendant employed at an LLC’s Michigan office was not a "custodian" of text messages on his cell phone running through the production of the company’s data. The Theory Group Inc. v. Regal Entm’t Group LLC, C.A. No. MID-L-2842-13, 12-18-2013 – Smith, Mark (Ridge member). The plaintiffs argued that Regal had control over the text messages:
In short, new technology has blurred the line between possession and control in ESI. The newest decision on the topic, Heng Cai v. Clean Air Holding, Inc. et al., came from a Southern District of New York court. In the case, Heng Cai sued his former employer, claiming the company blocked him from receiving his stock compensation. During the litigation, Clean Air Holdings produced emails allegedly deleted from its server. Huy Duong, the defendant in the case, claimed he did not send the email, and that someone had used his credentials to send it instead. He argued that this was a circumstantial case of spoiler spoliation (spoliation resulting from agnostic destruction rather than intentional misconduct). He also argued that the deletion of the email caused him prejudice. United States District Judge Jed S. Rakoff ruled, however, that the conduct of the company and the individual defendants qualified as spoliation that resulted from intentionally acting in bad faith.
As the case note summarizes:
In a litigious environment where sharing devices and cloud services is the norm, holding employees accountable for their actions on behalf of their companies has become more complicated. Courts have had to decide repeatedly if the environment in which electronic documents and communications are sent creates liability. Likewise, courts have had to establish what level of litigation the clerk, the record keeper, or the individual using the system must operate under.
Understanding the legal definition of a custodian gives you an idea of the challenges they can face, even if lawsuits are rare. If you would like to read more about the definition of "custodian," check out our post from last year.
The Process for Becoming a Custodian
The first step in the process of becoming a legal custodian is to determine whether or not the person or entity seeking to be a custodian is even eligible to serve in that function. For certain classes of custodians, like trust companies or banks, specific criteria have been put in place by statutes for appointment of that person or entity as a legal custodian. A straightforward example may be if the Recovery Trust Company is the legal custodian appointed pursuant to a statute governing the management of a bankruptcy estate. If the legal custody is sought for purposes of becoming a depository for public funds, certain qualifications are set forth in the statutes to which such entities must adhere. Other examples exist for certain classes of custodians, but eligibility can be very fact specific to the class of custodian and to the nature of the role itself (i.e., custodian of a minor or incapacitated person’s estate).
For those persons or entities who do not specifically fall within the qualification requirements established by statute, it is up to the court to determine eligibility based on the considerations discussed above , as well as the nature of the estate and the assets to be managed.
Another factor that may come into play when determining eligibility of a proposed custodian is either a surety bond or a personal guarantee in support of the proposed custodian. Although not always required, a party seeking to be appointed as a legal custodian may be required to execute a personal guarantee or a surety bond to pay any amount that the party fails to pay as the legal custodian, unless such failure was attributable to a cause beyond the party’s control. As a general rule, these guarantees and bonds are not required for the trustee of an inter vivos or testamentary trust or a testamentary guardian; however, specific requirements are set forth by law for those who are trustees of investment companies or self-directed custodians.
The process of becoming a legal custodian is not always a straightforward one and is often a legal hellscape to navigate. That said, if you find yourself on the horizon of needing to become a legal custodian, the first steps to consider are 1) eligibility and finding specific statutory authority and 2) feasibility and willingness to undergo the process involved with becoming a legal custodian.