NEW YORK, Oct 19 (Reuters) - A U.S. bankruptcy judge approved a request by ex-Lehman Brothers Holdings Inc directors, including former Chief Executive Officer Richard Fuld, to spend about $90 million in insurance money to settle fraud accusations brought by investors.

The settlement, approved on Wednesday, would end a three-year court battle accusing Lehman directors of painting a misleadingly optimistic picture of the investment bank's health in financial statements and securities offerings before its fortunes fell and it filed for bankruptcy.

The settlement still must be approved by the federal judge overseeing the fraud case.

At a court hearing in Manhattan, U.S. Bankruptcy Judge James Peck overruled objections by other Lehman officers who said the release of insurance funds might not leave enough money to cover a settlement in their own investor lawsuits.

Lehman filed the largest-ever Chapter 11 bankruptcy in 2008. It is trying to get support on a payout plan in which creditors would recover an average of about 20 cents on the dollar.

If creditors support the proposed $65 billion plan, the bankruptcy court could confirm it as early as December and Lehman could emerge from Chapter 11 soon afterward.

At Wednesday's hearing, Peck declined to rule on whether Lehman properly classified about $2.4 billion in claims from Deutsche Bank AG, saying the issue should be put off until the confirmation stage of the bankruptcy exit plan.

Lehman had classified the German bank's claims in a lower-priority group with less potential recovery. Deutsche Bank objected.

The decision creates uncertainty over whether Deutsche will abide by an earlier agreement to support Lehman's exit plan.

Alan Kolod, a lawyer for Deutsche Bank, said the bank had planned to support Lehman's bankruptcy exit plan pending resolution of the classification issue.

Now that that issue will probably not be resolved by the Nov. 4 deadline for creditors to vote on the plan, Kolod said Deutsche must address internally whether it can support the plan.

Peck said that question was "not my problem."

"Deutsche will either cast its vote in supporting the plan because it's required to do so, or ... expose itself to potential liability for not doing so," the judge said.

Peck said Deutsche Bank's objection in court amounted to a "preemptive confirmation objection."

Deutsche's claims, which it purchased in 2010 from Lehman's German unit, Lehman Brothers Bankhaus AG, are rooted in participation agreements in real-estate loans.

The amounts of the claims were established in a 2009 settlement between Lehman and Bankhaus that guaranteed that the claims would be treated as "general unsecured."

Lehman's plan instead classifies the claims as "affiliate," which means they would recover $100 million less than if they were classified in other "general unsecured claims" classes.

But Harvey Miller, Lehman's lead lawyer, said affiliate claims were a subset of general unsecured claims.

"The term 'general unsecured creditors' simply means a nonpriority unsecured creditor," Miller told Peck. "It has no secondary meaning."

Kolod said the term should not be so broadly defined and that Deutsche claims are not affiliate claims because the German bank is not an affiliate of Lehman.

The dispute grew heated at times, with Miller referring to Kolod as "Mr. Deutsche Bank" after Kolod momentarily forgot Miller's name.

Kolod said Lehman was attempting to "rewrite and reinterpret" the settlement agreement.

The case is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

(Reporting by Nick Brown)

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