New York's highest court allowed the state Tuesday to proceed with a lawsuit that had accused First American Corp and its eAppraiseIT unit of colluding with the former Washington Mutual Inc to fraudulently inflate home values.

The Court of Appeals rejected the defendants' argument that federal law precluded New York State Attorney General Eric Schneiderman from pursuing claims alleging fraud and violations of real estate appraisal independence rules. It upheld a June 2010 ruling by an intermediate state appeals court.

The eAppraiseIT unit is now part of CoreLogic Inc, which was created when First American split last year into that company and First American Financial Corp.

Andrew Cuomo, Schneiderman's predecessor and now New York's governor, had accused First American and eAppraiseIT in a November 2007 lawsuit of caving to pressure from Washington Mutual to use appraisers who provided inflated appraisals, to win more business.

Lenders that use inflated appraisals can sometimes make larger loans, including to borrowers who cannot afford them, and as a result collect higher fees.

Writing for a 6-1 Court of Appeals majority, Judge Carmen Ciparick said the attorney general's authority to pursue state law claims would at most only ``incidentally affect'' the lending operations of a federal savings association. Thus, she said federal law should not pre-empt the state law claims.

A lawyer for the defendants had no immediate comment on the decision. A spokesman for Schneiderman did not immediately respond to a request for a comment.

Washington Mutual failed in September 2008 in large part because it kept tens of billions of dollars of risky home loans that it had made on its balance sheet. JPMorgan Chase & Co bought the thrift's main banking operations.

In morning trading, CoreLogic shares were down 19 cents at $12.11, and First American Financial shares rose 17 cents to $11.33.

The case is Cuomo v. First American Corp et al, New York State Court of Appeals, No. 184.