An update to the above issue.
Friend went back down to the PD yesterday, in hopes of talking more in depth with this woman and looking for any explanation on why a US Passport would not be accepted. They argued and it wasn't going anywhere until she gave him a phone number to call. Who this phone number led to, I'm not sure. Maybe the FLRB? He said its where all the apps are sent to. He had a conversation with them and was told a US passport IS accepted (as they rightfully should be). Handed the phone off to her so she could verify it. After this it was smooth sailing for him. He said her demeanor changed and she was super nice. The app was submitted yesterday. I'd expect him to get his unrestricted license in the mail in the hopefully by Xmas.
Thank you to everyone who reached out privately as well as on the forum, as always it is much appreciated.