FILE PHOTO: U.S. President Donald Trump speaks with the media after his return from Pennsylvania, at Joint Base Andrews, Maryland, U.S., May 30, 2025. REUTERS/Leah Millis/File Photo

By Jonathan Stempel and Luc Cohen

NEW YORK (Reuters) -In a triumph for Donald Trump, a New York state appeals court on Thursday threw out a half-billion-dollar penalty while preserving a fraud case against him, enabling the U.S. president to rebound from one of his biggest legal defeats.

The deeply divided decision by the Appellate Division in Manhattan is also a defeat for New York Attorney General Letitia James, one of Trump's biggest foes, who he accused of bringing the civil fraud lawsuit to advance a political witch hunt and deny him a second White House term.

A trial judge had ordered the penalty in February 2024 after finding that Trump fraudulently overstated his wealth and the value of his properties to bolster his family business.

Trump denied wrongdoing, and his lawyers argued that any errors in reporting his fortune to his lenders and business partners were irrelevant because none was harmed.

Four judges on the five-member appeals court voted to let the fraud finding stand, but all found problems in the judge's handling of the case and two would have ordered a new trial.

A fifth judge would have dismissed the case altogether, and all five judges would have voided the payout. There was no majority opinion.

The original judgment against Trump, his adult sons and a former Trump Organization executive totaled $464.6 million, with Trump liable for $454.2 million. As interest continued to accrue, those respective sums have grown to $527 million and $515.2 million.

In a social media post, Trump called the decision a "TOTAL VICTORY."

"I greatly respect the fact that the Court had the Courage to throw out this unlawful and disgraceful Decision," the Republican wrote.

James, a Democrat who regularly said Trump was not above the law, said she will ask the Court of Appeals, the state's highest court, to review the case.

"It should not be lost to history: yet another court has ruled that the president violated the law, and that our case has merit," she added.

TRIAL JUDGE FOUND LACK OF CONTRITION

Trump was separately convicted in May 2024 on criminal charges in Manhattan stemming from hush money paid to porn star Stormy Daniels, but received no punishment.

His reelection also effectively meant the end of three other criminal cases he faced, including two for alleged interference in the 2020 election.

Trump is still challenging more than $88 million of civil verdicts won by the writer E. Jean Carroll, who accused him of defamation and rape. He has denied wrongdoing.

But his finances appear much improved, including from business tied to cryptocurrencies, compared to last year when he struggled to post a bond to appeal the $454.2-million judgment. He was later allowed to post a smaller bond.

James, meanwhile, is under investigation for possible mortgage fraud by the U.S. Department of Justice, as the White House uses the levers of government against people who have investigated Trump or resisted his agenda.

Prosecutors also convened a grand jury to investigate whether James' fraud case deprived Trump of his civil rights, a person familiar with the matter said this month.

In the civil fraud case, Trump had been appealing a judgment entered by Justice Arthur Engoron in Manhattan, following a three-month nonjury trial.

Engoron found Trump had inflated his wealth over several years before becoming president in 2017, to dupe lenders and insurers into providing better terms to the Trump Organization.

Finding a "complete lack of contrition," Engoron ordered Trump to pay about 98% of the $464.6-million judgment.

Trump's sons Donald Trump Jr. and Eric Trump, and former Trump Organization chief financial officer Allen Weisselberg, were to pay the rest.

Engoron also banned Trump and the Trump Organization from applying for loans from banks registered in the state for three years, and effectively barred the sons from the business for two years.

The appeals court put those restrictions on hold during the appeals process, while letting a court-appointed monitor for the Trump Organization continue her work. Thursday's decision lets those restrictions take effect.

NO 'CATACLYSMIC HARM'

Two judges involved in the decision agreed the defendants "engaged in a decade-long pattern of financial fraud and illegality."

But they said Trump's wrongdoing did not cause "cataclysmic harm" to justify a half-billion-dollar award, though injunctive relief to prevent future wrongdoing was appropriate.

"The Attorney General may act, as she did in this case, before a potential catastrophe occurs, to deter further fraudulent business behavior," wrote Justice Peter Moulton, joined by the chief judge Dianne Renwick.

"Having achieved these goals," he added, "the state is not entitled to compound its victory with a massive punitive fine."

Two other judges, John Higgitt and Llinet Rosado, agreed James had authority to sue, but a new trial was necessary because Engoron was too quick to find fraud.

They agreed "with great reluctance" not to disturb the fraud finding, to allow an appeal.

Justice David Friedman, the only judge on the panel appointed by a Republican governor, said James' case was politically motivated, and voters had rendered their own verdict on Trump's political career.

He also said another trial "would disrupt the political life of the United States and would undermine its national interest, particularly at a time of high global tension."

Moulton also rejected a new trial, saying Trump's presidency and the difficulties of starting afresh "would likely consign this meritorious case to oblivion."

(Reporting by Jonathan Stempel and Luc Cohen in New YorkEditing by Noeleen Walder and Rod Nickel)