The case is moot, a federal judge said, because the administration has resumed the flow of more than $200 million in funding that it had temporarily stopped.
The Gateway Tunnel is set to run between New York and New Jersey. President Donald Trump has personally opposed the plan and insisted that the federal government would not assist with cost overruns.
Payments for the $16 billion rail tunnel between New York City and New Jersey had been suspended for more than four months.
The U.S. Court of Appeals for the 2nd Circuit's decision means the Trump administration will have to release the funds for now, but the court is expected to issue another ruling after hearing oral arguments in the case later this month.
The White House appeared to clarify that it was Trump who floated the idea when discussing the restoration of $16 billion in federal funds that was previously designated for the Gateway rail tunnel project.
U.S. District Judge Jeannette Vargas had ordered the funding for a $16 billion tunnel project restored last week, but on Monday granted a temporary stay after the federal government appealed her decision.
Administration officials told the top Senate Democrat the president would release frozen funding for the Gateway project if the transportation hubs were renamed for him.
Nearly all of the work was scheduled to stop on Friday unless federal officials agreed to restore funding that had been halted last year or a court ordered them to.