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By Karen Freifeld

NEW YORK (Reuters) – Republican presidential front-runner Donald Trump suffered a legal setback on Tuesday when a New York state court allowed a multimillion-dollar fraud claim against Trump University, filed by the state’s attorney general, to proceed.

The claim is part of a lawsuit that accuses Trump and the now-defunct for-profit venture of misleading thousands of people, who paid up to $35,000 to learn the billionaire businessman’s real estate investment strategies.

Trump University, which Trump chaired, has become a target for his rivals for the Republican presidential nomination, particularly Marco Rubio.

Attorney General Eric Schneiderman’s lawsuit, filed in 2013, seeks $40 million in restitution plus penalties and other costs, his office said.

The ruling by a four-judge panel of a mid-level appeals court in Manhattan brings the case closer to a potential trial. It could make it easier for the Trump venture ultimately to be held liable, because the claim does not require proof that there was intent to defraud.

The judges also extended the statute of limitations for the claim back to 2007 instead of 2010, as Trump’s attorneys want. The program stopped taking students in 2010.

“Today’s decision is a clear victory in our effort to hold Donald Trump and Trump University accountable for defrauding thousands of students,” Schneiderman said in a statement.

The Trump Organization’s general counsel, Alan Garten, said he would seek to appeal the ruling, and called the case “politically motivated.” Schneiderman is a Democrat.

“We think all these claims are without merit and baseless,” Garten said. “Ninety-eight percent of those who participated in the programs filled out written surveys giving the programs the highest grades.”

Class actions are pending in California on similar claims by former Trump University students.

Rubio, who hammered Trump over Trump University at last week’s Republican presidential debate, on Tuesday pointed to the New York court’s decision at a rally in Minneapolis.

The U.S. senator from Florida said prospective Trump University students increased the borrowing limit on their credit cards in order to pay for the course.

“Some graduated, some didn’t, but in the end the only thing you got was a piece of paper that was worthless and a picture with a cardboard cutout of Donald Trump,” he said.

“That’s a fraud case and it is outrageous,” Rubio said. “…What he did to those people is what he is doing to Americans now.”

At the debate, Trump told Rubio he had won most of the lawsuits involving Trump University.

The appeals court’s decision revived a second claim for fraud. A lower-court judge had allowed Schneiderman to proceed only on a type of fraud known as common-law fraud, which would have been more difficult to prove.

The lower-court judge in Manhattan has already determined that Trump and his university are liable for operating illegally in New York state as an unlicensed educational institution.

New York notified Trump in 2005 that he was violating state education law by using the word “University” when it was not actually chartered as one. In 2010, Trump University changed its name to Trump Entrepreneur Initiative and later that year notified the state Department of Education that it had ceased operations.

(Reporting By Karen Freifeld; Editing by Jonathan Oatis and Alexia Garamfalvi)

Photo: Republican U.S. presidential candidate Donald Trump holds a rally at Clemson University’s livestock arena in Pendleton, South Carolina February 10, 2016. REUTERS/Jonathan Ernst

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