Schnatter on Wednesday apologized in an emailed statement for using the racial slur.
"Regardless of the context, I apologize", he said, according to CNBC.
Schnatter apologised previous year for remarks he made when he criticised the NFL for its handling of players' national-anthem protests, saying the comments hurt the pizza chain's sales.
U of L board of trustees chairman J. David Grissom disclosed Schnatter's resignation from the university's governing board in a statement. "Simply stated, racism has no place in our society", his statement added. Papa John's headquarters are located in Louisville, and the university's football team's stadium is named the Papa John's Cardinal Stadium.
Schnatter also reflected on his youth growing up in IN, where he allegedly said on the conference call that "people used to drag African-Americans from trucks until they died", according to the Forbes report, which claimed that Schnatter shared the story in a misguided effort to show his distaste for racism. "No member of the board of trustees condones racism or insensitive language regardless of the setting".
Papa John's shares fell almost 5 percent Wednesday after the report, closing at $48.33.
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Papa John's was the longtime exclusive pizza sponsor of the NFL, but ended its partnership with the league earlier this year under new CEO Steve Ritchie.
In Schnatter's IN hometown, Moore said that threats of litigation aside, he hoped the $800,000 donation would not be rescinded, because it was helping so many "inner-city kids" who would be using the building not only as their school gymnasium but as an after-school "safe place". Schnatter was asked how he would distance himself from racist groups online.
Schnatter, for his part, confirmed the incident to Forbes on Wednesday.
A spokeswoman for this marketing company, Laundry Service, told Insider that they have no comment on the Forbes story.
Papa John's has once again shot itself, blowing off its metaphorical foot.
The news comes the same day Schnatter faced intense backlash for using the racial slur while taking part in an exercise on handling public relations.
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