The court also said there was insufficient evidence to sustain the obstruction-of-justice convictions of Schwarz, 36, and officers Thomas Wiese, 38, and Thomas Bruder, 35. Wiese and Bruder had been accused of lying to cover up Schwarz's role.
The ruling did not affect the guilty plea of the main attacker, Justin Volpe, 37, who admitted he sodomized the handcuffed Louima with a broken broomstick in a fit of rage. Volpe is serving 30 years.
Civil rights leaders and Louima supporters expressed outrage over the ruling, which reopens an explosive case that inflamed racial tensions and touched off street protests.
The appeals court entered a judgment of acquittal for all three officers on the obstruction charges, effectively bringing an end to the case against Wiese and Bruder. The two men had been given five-year prison sentences but have been free on bail during their appeal.
However, the court ordered a new trial on the civil rights charges for Schwartz, who is serving 15 years behind bars in Oklahoma.