IP Law Daily, COPYRIGHT—D. Colo.: Banks largely escape liability for funding of allegedly infringing development, (Sep 30, 2025)

By Matthew Hersh, J.D.

The banks were not contributorily liable for any infringement—and claims of vicarious liability were substantially narrowed.

The banks that funded the construction of two housing developments by a Colorado Springs real estate developer could not be contributorily liable for the developer’s allegedly unlicensed use of copyright architectural designs because the banks did not act with the intent to infringe and did not “encourage or assist” the alleged infringement, the federal court for Denver has held. The court, in partially granting the two banks’ motion to dismiss, also substantially narrowed the timeframe in which they could be vicariously liable for the developer’s activities (Woodley Architectural Group, Inc. v. Lokal Communities, LLC, No. 1:23-cv-03004-CNS-KAS (D. Colo. Sept. 26, 2025)).

The lawsuit was brought by Woodley Architectural Group, an architecture firm with offices in Colorado, California and Arizona. The complaint alleges that Lokal Communities, an Engelwood-based real estate developer, built and sold two houses that improperly used the firm’s copyrighted architectural designs. The lawsuit also takes aim at two banks, Western Alliance Bank and Flagstar Bank, for their role in funding the developments. Each of the banks, the complaint asserts, was contributorily and vicariously liable for the allegedly infringing conduct of the developer.

The two banks moved to dismiss the claims against them, leading to this opinion.

Contributory liability. The court dismissed the claims of contributory infringement against the banks. To adequately plead a claim for contributory copyright infringement liability, the court noted, a plaintiff must sufficiently allege that the defendant knew of the infringement and caused or materially contributed to that infringement. The architecture firm failed to meet the pleading threshold for this claim.

The court began with the claims against Western Alliance Bank, the construction lender for one of the allegedly infringing developments. The bank did not dispute that it had knowledge of the developer’s alleged infringement once it was served with the complaint in this case in 2024. But the bank vigorously disputed that it was aware of the alleged infringement prior to that date. The court agreed. The architectural firm pointed to a provision of the financing agreement that required the developer to disclose any pending or threatened litigation that could result in a loss of more than $50,000. But that alone was not enough, the court found. “Although Plaintiff has sufficiently pleaded Lokal’s litigation disclosure obligations,” the court noted, “the complaint does not include any allegations—as it must—as to how or when Lokal allegedly made this information known” to the bank. Knowledge prior to the complaint was therefore not sufficiently pled, the court found.

Moreover, the court noted, the architecture firm failed to adequately plead that the bank materially contributed—either before or after it became aware of the lawsuit—to the developer’s alleged infringement. The firm argued that it adequately pleaded a material contribution by alleging that the bank continued to provide funding for the project even after learning of the lawsuit. But in order to make out a contributory infringement claim, the court noted, the architect would have to show that the bank acted with “intent” or engaged in conduct that “encourages or assists” the infringement. “Absent additional allegations to establish [the bank’s] intent, or allegations that [the bank] did more than continue to provide construction funding,” the court reasoned, “dismissal of the contributory infringement claim is proper.”

The same reasoning applied to the claim against Flagstar (which unlike Western Alliance, was involved in funding both of the allegedly infringing developments). With respect to knowledge, the court found, the architecture firm’s pleadings established knowledge only as of the time the bank was served with the complaint, and not before. As far as material contribution, the court found, the allegations of Flagstar’s “mere knowledge of infringing potential or of actual infringing uses” were not enough to establish liability because they lacked “any additional factual allegations describing instances of [Flagstar] encouraging or promoting Lokal’s infringement.” The contributory liability claims against both banks, therefore, would fail.

Vicarious liability. The court also dismissed the vicarious liability claims against the two banks, albeit with one exception. In contrast to contributory liability, the court noted, vicarious liability has no knowledge requirement and instead attaches “when the defendant has the right and ability to supervise the infringing activity and has a direct financial interest in such activities.” Here, the court found, the claims were adequately plead only for the narrow time frame after the complaint was served on the banks—but not before.

The court began with the claims against Western Alliance Bank. With respect to the bank’s financial interest in the allegedly infringing construction, the court noted, the allegations were strong enough to go forward for now. Although the funding agreement was not entirely clear, at least as described in the complaint, it was plausible to read the agreement to provide that the bank would be repaid for its loan from the proceeds of sales of the allegedly infringing development. “Although a close call,” the court noted, “the Court agrees with [the architecture firm] that the allegations are sufficient to establish [the bank’s] direct financial interest at the pleading stage.”

But the allegation became more challenging with respect to the “right and ability to supervise” prong. The architecture firm claimed that the bank had the right and ability to supervise the developer throughout the entire project because it had the power to approve the plans of the infringing houses ahead of construction, commission appraisals of those properties, and conduct inspections of the sites. But “without pleading facts to suggest that [the bank] actually conducted inspections or supervised the infringing work,” the court reasoned, these allegations were insufficient. For vicarious liability to attach, the court emphasized, “the parties' paths must cross on a daily basis, and the character of this intersection must be such that the party against whom liability is sought is in a position to control the personnel and activities responsible for the direct infringement.” Here, the court found, that standard was not met. “That [the bank] could have conducted inspections at [the site] does not mean that it did, and [the firm] does not plead otherwise,” the court found. “Likewise, just because [the bank] could have inspected [the site] does not mean that it had the practical ability to control the construction site.”

But while the bank did not have the requisite right and ability to control throughout the life of the project, the court noted, the situation was different once the complaint was served upon the bank. Although the bank did not generally have the right to control the day-to-day operations at the site under the funding agreement, the court noted, the bank’s power over the site increased significantly once it learned of the allegation of any violation of federal law—including copyright infringement. Indeed, the court noted, the funding agreement expressly authorized the bank to stop the work in order to ensure that copyright law requirements were being followed. “These provisions—and allegations attendant to them—grant [the bank] greater authority and control than a mere lender,” the court agreement. But the bank’s power to take day-to-day control of the project, the court emphasized, “vested only after [the bank] knew that Lokal had defaulted or failed to comply with” the funding agreement’s requirements.

Finally, the court noted, the allegations against the other bank—Flagstar—would follow the same path as those against Western Alliance. The funding agreement between Flagstar and the developer, as with the agreement between Western Alliance and the developer, could be interpreted to hold that the bank would be paid back with proceeds from the allegedly infringing development. “Although discovery may make clear that Flagstar’s only direct financial interest was the repayment of its own loans irrespective of whether the properties were built,” the court noted, “at this stage, [the architecture firm’s] allegations are sufficient to establish the first prong of its vicarious liability claim.” As for the right and ability to control, the court noted, the outcome would also be the same, as Flagstar’s ability to control the day-to-day activities at the site kicked in only once the copyright infringement complaint was served. The claim would therefore be narrowed against both banks to cover that latter time period.

The Case is No. 1:23-cv-03004-CNS-KAS.

Judge: Sweeney, C.

Attorneys: Caitlin C. McHugh (Womble Bond Dickinson [US] LLP) for Woodley Architectural Group, Inc. James Juo (Thomas P. Howard LLC) for Lokal Communities, LLC, Lokal Homes, LLC and L&L Holding Co., LLC.

Companies: Woodley Architectural Group, Inc.; Lokal Communities, LLC; Lokal Homes, LLC; L&L Holding Co., LLC

Cases: Copyright ColoradoNews GCNNews