University of Texas Law School Crisis Redux: UT System and AG Critical of Forgivable Loans

The Texas Tribune has the story and the links to the pertinent documents arising from last year's turmoil.  Only a small portion of the report is actually given over to criticizing the forgivable loan the Law School Foundation gave to former Dean Larry Sager (his spokesman has a sharp response to that which can be downloaded here); most of the report analyzes the history of the Foundation (whose purpose was precisely to supplement faculty salaries to make Texas more competitive) and mustering arguments against the use of the device of forgivable loans.  Strikingly, on page 20 of the report, the UT System General Counsel notes:

Without speaking to issues of the use of forgivable personal loans by a public university for the moment, the vehicle of a forgivable personal loan is a highly effective and sensible recruiting and retention tool. It quite simply combines the best of both worlds – (1) it provides an upfront slug of cash like a signing bonus without the immediate tax consequence to the recipient; and (2) it provides the same retention (i.e., golden handcuffs) of deferred compensation. It is, therefore, not surprising that forgivable personal loans became a favored tool of the Law School in its drive to recruit and keep world class faculty.

Notwithstanding this sensible explanation of why the device is useful and widespread, the report concludes that such a salary supplement is inappropriate for a public university.  Even more bizarrely, the AG letter says the existing loans should be terminated immediately.   I'm not sure whether the proposal is to court a series of breach of contract lawsuits or simply to pay out the remaining amount in a lump sum, which would, of course, defeat the purpose of the way this compensation is structured.  One can see already the consequences of this whole crisis in the disproportionate presence of former (or soon-to-be former) UT faculty in a list of recent lateral moves, and this latest development is, sad to say, likely to exacerbate the exodus of faculty. 

UPDATE:  I've now taken a closer look at the AG's letter, which is alarming; it states, ominously:

While we agree in large part with the Report’s recommendations regarding the forgivable loan program and the structure of the Foundation, we disagree with the Report’s recommendation about how to properly handle the Foundation’s outstanding forgivable loan contracts. The Report recommends that the Foundation no longer extend forgivable loans directly to members of the Law School faculty—a recommendation with which we agree—but nonetheless recommends that outstanding loan agreements between the Foundation and faculty members be allowed to expire on their own terms. Report at 27.

According to the Report, all the Foundation’s existing forgivable loan agreements will expire within three years. Id. at 27 n.150. Given our conclusion that the Foundation’s forgivable loan program is legally problematic, it is difficult to also conclude that such an arrangement should nonetheless be allowed to continue years into the future.

Accordingly, we conclude that the more legally sound approach requires that the Foundation extinguish its existing loans and instead allow the Law School’s new executive management to establish a properly controlled compensation program governed by applicable University policies and procedures.

Finally, when the General Counsel’s Report is published, all affected parties will be on notice that there are significant legal and ethical issues surrounding the Foundation’s forgivable loan program. Given the parties’ awareness of the prior program’s flaws, extinguishing and replacing the outstanding forgivable loan agreements is the surest step toward eliminating the possibility of future legal liability. The Report correctly notes that such action would require the involvement of both parties to the loan agreements and should not be undertaken without the advice of counsel, including tax counsel for the Foundation and for the faculty members.

This rather plainly implies that the AG may, in fact, attempt to recoup the forgivable loans.  The AG, it's worth bearing in mind, is a loyal ally of the reactionary Texas Governor Rick Perry, one who has political ambitions of his own, and appears to share with Perry hostility towards the universities.  If the AG actually follows through on the ominous warning, I really fear for the future of the University of Texas School of Law as a leading academic institution.  I do wonder whether some of my former colleagues who stirred this particular pot are pleased with what they've accomplished.

ANOTHER:  A reader with experience in a state AG's office (not Texas) has a different take:

First, I take a different read of what the Texas AG letter is saying.  I read it as basically advising that the forgiveable loans are a big litigation risk because (1) everyone now knows that they are "legally problematic," and (2) they are going to be hanging out there for several years.  That's a big target for a disgruntled UT faculty member, or even maybe a crazy anti-tax or anti-government taxpayer-citizen off the street.  (With respect to the latter, it looks like the Foundation is set up to immunize it from a taxpayer suit, but that's going to depend on the specifics of Texas taxpayer standing rules and the Foundation's structure --and even if a lawsuit ultimately gets dismissed for lack of standing, it's still a huge hassle for everyone.)  Better to wind the outstanding loans up now.  And note that the letter acknowledges that "extinguishing" the loans will require both parties to agree, so I think it envisions something more like accelerating the forgiveness date in exchange for a promise to stay the required term or something along those lines (which admittedly would have tax consequences, which the letter also acknowledges).  I definitely don't read it as threatening to unilaterally seek to recoup the loans.