The 3-to-2 ruling by the NY appellate court enables Summer Zervos, a former contestant on "The Apprentice," to press forward toward a Manhattan trial of her allegation that Trump defamed her by branding her a liar in the weeks before he was elected president.
Trump denied the allegation, writing in a statement at the time that he "never met her at a hotel or greeted her inappropriately".
The decision may allow Zervos' lawyers to question Trump under oath about whether he defamed her by calling her a liar after she accused him of sexual misconduct.
The main crux of Renwick's opinion centered on what she said was a poor reading of the Constitution's Supremacy Clause by Trump's legal team.
The New York State Appellate Division's First Department turned down Trump's argument that the case should be halted until he is out of office because, as a sitting president, he was immune from a lawsuit brought in state court.
Zervos' lawyers say Trump's words were factual falsehoods that subjected her to threats.
In its ruling Thursday, a panel of NY appellate judges rejected that argument, citing the U.S. Supreme Court's ruling in Clinton v. Jones, which established that presidents can be sued while in office for unofficial acts.
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Justice Jennifer Schecter originally allowed the case to proceed in March of previous year, arguing that nothing in the U.S. Constitution's Supremacy Clause suggests the president is immune from civil lawsuits.
Judge Renwick "wrote that the Supremacy Clause of the US Constitution - which generally says that when state and federal law conflict, federal law prevails - did not override a state court's authority to decide cases under the state's own constitution", Buzzfeed's Zoe Tillman explains.
Zervos appeared on "The Apprentice" in 2006, when Trump was the reality show's host.
Several other women have accused Mr Trump of improper sexual conduct. A finding in Mr. Trump's favor could have derailed at least two other cases in NY courts, including a wide-ranging probe into the Trump Organization by the state's attorney general. Trump also republished on Twitter a post calling Zervos' accusations a "hoax".
Her lawyer, Mariann Wang, said in an emailed statements she was pleased the judges had ruled that Trump was "not above the law". Trump claims that Zervos made numerous attempts to contact him and seek employment even after the alleged sexual harassment occurred. "We look forward to proving that Ms. Zervos told the truth about Defendant's unwanted sexual groping and holding him accountable for his malicious lies".
The appeals court majority disagreed.
A lawyer for the Trump Organization did not immediately respond to a request for comment.