Morgan Keegan & Co. v. Swan (In re Swan), 499 B.R. 118

Diana Swan transferred two UBS margin accounts (one joint with her elderly mother, one individual) to Morgan Keegan in November 2007 and signed new account forms (NAFs) for each.
The NAFs listed materially inflated figures: annual income > $150,000 and liquid net worth > $1,000,000; actual records showed her individual income ≈ $19,000 and liquid assets ≈ $852k in stock and cash (after adjustments).
Morgan Keegan approved the transfers based on the written financial statements; its routine practice (and industry custom) was not to verify income/assets or run credit checks when opening margin accounts.
After the accounts were merged, stock declined; Swan partially covered a margin call ($60,000) but later defaulted; Morgan Keegan liquidated securities and obtained an arbitration award against Swan for about $242,117 plus $72,480 in fees.
Swan later filed Chapter 7; Morgan Keegan brought an adversary complaint under 11 U.S.C. § 523(a)(2)(B) seeking a determination that the arbitration debt is nondischargeable as obtained by materially false written statements.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the NAFs contained materially false statements about Swan’s financial condition	NAFs grossly overstated income and liquid net worth and thus painted a false financial picture	Overstatement not material or requires debtor knowledge for materiality	Held materially false; gross overstatements distorted her financial picture and were material
Whether Morgan Keegan reasonably relied on the NAFs when approving the accounts	Reliance was reasonable given Morgan Keegan’s normal practices and industry custom not to verify	Reliance was unreasonable because Morgan Keegan did not independently verify and ignored alleged “red flags”	Held reliance was reasonable under totality of circumstances and consistent with industry/firm practice; alleged red flags did not require further inquiry
Whether Swan had intent to deceive in submitting the false NAFs	Swan acted with knowledge or reckless disregard for accuracy, supporting intent to deceive	Swan believed the information to be accurate and lacked intent to deceive	Held intent may be inferred from circumstances; Swan’s explanations not credible — knowledge or reckless indifference established

Grogan v. Garner, 498 U.S. 279 (1991) (creditor bears preponderance burden to prove nondischargeability)
Merchants Nat’l Bank v. Denenberg (In re Denenberg), 37 B.R. 267 (Bankr. D. Mass. 1983) (materiality and lender-reliance standards for financial statements)
Ins. Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108 (3d Cir. 1995) (intent may be inferred from reckless indifference to falsity)
In re Sheridan, 57 F.3d 627 (7th Cir. 1995) (intent to deceive can be shown circumstantially)
Advest, Inc. v. McCarthy, 914 F.2d 6 (1st Cir. 1990) (description of margin accounts)
Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (exceptions to discharge construed narrowly)