University of Phoenix Deal Faces Showdown With Idaho’s Legislature

In one of the fastest-moving stories we’ve ever covered here at OnlineEducation.com, a legal memorandum by the Idaho Legislature’s counsel marked a turning point in the battle over the University of Idaho’s proposed acquisition of the online, for-profit University of Phoenix.

That’s because the February 2024 memorandum formed the basis for a bipartisan resolution in the Idaho Legislature that requests the State Board of Education reconsider its support behind the Phoenix acquisition. The measure also authorizes litigation that will delay or kill the deal should the Board refuse. Idaho’s House of Representatives passed the resolution by an overwhelming margin, and at press time, it awaits consideration by the State Senate.

The sharply-worded memorandum recommended that lawmakers take “appropriate legal action” against the Phoenix deal. It argues that the State Board overstepped its authority and violated Idaho’s State Constitution by voting to approve the purchase.

“Although my concerns are many, my primary concern is this: the Board is attempting to escape its Constitutional and statutory limitations by recreating itself as a private corporation,” wrote Legislative Legal Counsel Elizabeth Bowen in a 10-page analysis prepared for a bipartisan coalition of seven legislative leaders opposed to the Phoenix deal. “If the Board’s conduct is allowed to stand, an incredibly dangerous precedent would be set, perhaps inspiring other state agencies impatient with their Constitutional and statutory restrictions to follow suit.”

Before we present more of Bowen’s remarks and their fallout, first, here’s an update on the University of Idaho’s attempt to acquire Phoenix. We covered Idaho’s initiative in a series of reports here on OnlineEducation.com after covering a similar bid for Phoenix that the University of Arkansas Board of Trustees rejected in 2023.

On May 18, 2023, Idaho’s Board of Education unanimously voted to approve the $685 million Phoenix acquisition roughly 24 hours after the proposal’s initial public announcement. Attorney General Raul Labrador promptly filed a lawsuit to void the vote, alleging violations of Idaho’s open meetings statute because all deliberations and negotiations before the vote were conducted in secret under nondisclosure agreements.

While that litigation’s discovery phase was in progress, the Biden Administration forgave $37 million in student loans for about 1,200 borrowers who attended Phoenix in October. Key financial details disclosed for the first time by the U.S. Department of Education, along with that announcement and in a related Freedom of Information Act data release, imply that Phoenix might eventually end up on the hook for a range between $1.1 billion and $15 billion in student loan recoupments. Nearly a dozen congressional leaders led by Senator Richard Durbin of Illinois then pressured the Education Department to begin the recoupment process for the $37 million in forgiven loans from Phoenix.

Since our most recent coverage of the Phoenix story last November, several additional developments have taken place. First, after a relatively lengthy trial, an Idaho state court judge ruled against the attorney general’s lawsuit in January 2024. Labrador then filed an appeal with the Idaho Supreme Court.

Next, on February 7, the Northwest Commission on Colleges and Universities announced its decision not to question the deal in its role as the University of Idaho’s accreditor.

On February 14, Moody’s Investors Service announced a review of the University of Idaho’s A1 bond rating. Citing Phoenix’s “various legal and regulatory liabilities,” the bond ratings firm said that the deal could result in “a substantial increase of U of I’s total debt and leverage profile.”

In an interview with a Wall Street bond industry trade publication, a Moody’s executive even warned that the acquisition might trigger a “multi-notch” downgrade to the university’s bond rating. Although we stopped short of predicting such an outcome in our coverage here on OnlineEducation.com, our analysis suggested a few of the reasons why Moody’s might eventually decide to take such a step if Idaho completes the acquisition.

The following day, on February 15, legislators in Idaho’s House State Affairs Committee introduced House Concurrent Resolution 26, their joint measure that authorizes legal action if the Board of Education doesn’t reconsider its support of the purchase.

That resolution set up two showdowns between the Legislature and the deal’s advocates. The first showdown kicked off during the contentious public hearings on the resolution. The second showdown could take place if the Legislature takes Bowen’s advice and sues the university and the Board to block the acquisition.

“If we are going to enter into acquisitions of this magnitude, we need to be at the table,” said the committee’s chair, Rep. Brent Crane of Nampa during the resolution’s introduction. He expressed frustrations that lawmakers were shut out of the deal’s secret negotiations early in 2023.

The resolution’s co-sponsor, Rep. John Gannon of Boise, also criticized the U of I for withholding information about the deal and even billing news outlets to provide them with copies of public records. “If it’s such a good deal, then we should know everything,” he said. “Everything should be on the table at this point.”

Then, on February 28, at tense hearings before the Joint Finance-Appropriations Committee, the legislative showdown continued as lawmakers grilled University of Idaho President Scott Green about the acquisition’s financial risks and legal authority. Green argued that constitutional law specialists with the Idaho law firms Hawley Troxell and Holland and Hart had advised the university that the deal would survive legal challenges.

Following hours of testimony the next day, on February 29—and despite warnings by State Board member Kurt Liebich that litigation could put the acquisition at “grave risk” by delaying financing in the bond market—on March 1, the House State Affairs Committee unanimously voted to send the measure to the full House.

Also on March 1, the Idaho Supreme Court announced that it had scheduled oral arguments for June in Attorney General Raul Labrador’s open meetings lawsuit appeal. That fact suggests a nonbinding May 31 closing deadline—after which either party could walk away from the Phoenix deal—might no longer apply.

On March 5, Idaho’s House passed the resolution on a 49-21 vote and sent the measure on to the state Senate. Legislative leaders have said that they would like to adjourn the current session before the end of March.

On March 11, two more legal memoranda filed with the Legislature prompted the Idaho Statesman’s editorial board on March 14 to call for the University of Idaho to “pull the plug on this whole deal while we can still get out.” Before we discuss those filings, we first take a closer look at the game-changing analysis by the legislative counsel.

The legislative counsel’s legal memorandum marked a turning point in the Phoenix acquisition fight because before the release of that document, no other authority had forcefully argued against the deal’s purported legal foundations. In her analysis for the Legislature’s leadership, Bowen spots three main issues:

1. The Board has no Constitutional or statutory authority to acquire, own, and operate a private institution or to assume its liabilities, either directly or indirectly through a corporation.
2. The Board has no Constitutional or statutory authority to invent powers for itself.
3. The Board is endangering sovereign immunity by claiming corporate membership for itself and the University of Idaho and by acting outside the scope of its legal authority.

The Board Lacks Authority to Acquire, Own and Operate a Private Institution

Bowen argues that when the Board authorized the creation of a corporation now known as Four Three Education Inc. to acquire the assets and assume the liabilities of the University of Phoenix, neither the Board nor the University of Idaho first requested legislation to convert Phoenix from a private into a state institution. That’s significant because she asserts that the Board lacks any statutory or constitutional authority to acquire, own, operate, or assume the liabilities of a private higher education institution. To the contrary, she quotes the Idaho Constitution which says the Board only has “general supervision of the state educational institutions and public school system of the state of Idaho,” along with other powers and duties as “prescribed by law.”

What specifically is prescribed by law? Bowen says that the Board and University invoke four sources. These sources include the Board’s Governing Policies and Procedures, Article IX of the Idaho Constitution, Idaho Code § 33-2802, and Idaho’s Nonprofit Corporation Act. She spends the next six pages and 34 footnotes essentially explaining why none of these sources has the authority to convert Phoenix from a private entity into a state institution or provide the Board and the University the authority they would need to do what they propose, which is to acquire, own, operate, or assume the liabilities of a private higher education institution.

Furthermore, she argues that because neither the state, its entities, nor the Board has the authority to directly create corporations, she also claims that Four Three Education is not a valid corporation and has no legal existence. She concludes this section with a tough warning:

It is my belief that if the State Board of Education and the University of Idaho proceed under the current terms of the proposed transaction, they do so at their peril. Far more disturbingly, they do so at the peril of the Legislature and the people of Idaho, who might be called on to rescue the University of Idaho from a disastrous financial judgment.

The Board Has No Authority to Invent Powers for Itself

Second, Bowen argues that Idaho’s Constitution distributes some powers and duties to the Board but specifies that other powers and duties are “prescribed by law.” And in Idaho, only the Legislature has the power to make law.

Without that ability to create law, she says the Board can’t give itself new powers and duties that are reserved for the Legislature, such as the power to create a corporation or operate a private institution. “In attempting to give itself new powers, the Board has unconstitutionally encroached on the legislative power,” she says.

The Board Endangers Sovereign Immunity by Acting Outside Its Legal Authority’s Scope

Third, Bowen argues that generally plaintiffs are not able to sue a state under the doctrine of sovereign immunity, and this doctrine would usually also protect the University of Idaho from lawsuits.

However, the doctrine doesn’t protect states or state entities from litigation in certain key circumstances, such as lawsuits alleging violations of the State Constitution. Nor does it protect state entities that acted beyond the scope of their legal authority, as Bowen alleges that the Board has done. In other words, by acting beyond its granted authority, the Board “recklessly surrenders” the state’s sovereign immunity protections.

Bowen’s Recommendations for Relief and Concluding Remarks

Bowen concludes her memorandum by recommending that the Legislature should ask for or file appropriate legal action, except in two potential instances where the Board either abandons the Phoenix transaction or alternatively seeks to restructure the transaction subject to the Legislature’s approval.

She first advises the legislators to request that Attorney General Labrador file a lawsuit against the Board for acting outside the scope of its charter and against Four Three to cancel its incorporation, alleging unconstitutional and unlawful formation. Should he decline, she recommends that the Legislature retain experienced civil litigation counsel to advise the lawmakers of their options for relief on behalf of the people of Idaho (which, as we’ll see below, the legislators already have done). Here are her parting thoughts:

The proposed Phoenix transaction is a matter of tremendous public importance, but the people and their elected representatives have so far been deprived of their right to have any meaningful say in the matter. The most solemn obligation of any public entity is to serve the public interest. If the State Board of Education and the University of Idaho have forgotten that—if, indeed, they have forgotten that they exist only by leave of the people, to perform duties for and on behalf of the people, using powers conferred on them by the people—they should be reminded. Neither the Board nor the University is private, and they have no legal right to act as if they are.

As we mentioned, two additional legal memoranda were filed with the Legislature’s leadership on March 11. One analysis was written by lawyers Preston Carter and Morgan Goodin with the Boise law firm Givens Pursley, a firm that the Legislature had hired to provide an external review of the Phoenix acquisition. The other memorandum was filed by the office of Attorney General Raul Labrador.

Both memoranda advocate additional arguments not extensively discussed in the legislative counsel’s analysis. For example, the attorney general’s memorandum provides exhaustive analyses of the limits to the delegations of constitutional powers, along with further limits through two doctrines: the separation of powers doctrine and Idaho’s public purpose doctrine.

Nevertheless, the conclusions of both memoranda agree with those of the legislative counsel that the Board had violated Idaho’s Constitution and lacked authority to approve the Phoenix acquisition. All three opinions also agree that Idaho law does not permit the Board to acquire, own, and operate Phoenix through Four Three Education, Inc. Specifically, the Givens Pursley lawyers conclude:

Neither existing case law nor the relevant constitutional or statutory provisions provide the Board with authority to create a private corporation to acquire the assets of another university and operate those assets separately from the University of Idaho.

Based on our review of applicable legal authorities, in our opinion the Board lacks the legal authority to create a private corporation to acquire the assets of the University of Phoenix and operate those assets doing business as the University of Phoenix, separately from the University of Idaho.