(Reuters) -- A federal judge in New York Monday refused to delay the approval process for a controversial $20 million settlement between Bank of America Corp directors and shareholders who accused the bank of overpaying for Merrill Lynch & Co.

U.S. District Judge Kevin Castel rejected as premature a request by another shareholder group, pursuing a similar lawsuit against Bank of America directors, to intervene in the New York case.

The second group of shareholders, who have taken action in the Delaware Chancery Court, say the New York settlement is too low and could erase its claims.

Bank of America agreed to buy Merrill on Sept. 15, 2008, at the height of the financial crisis. Merrill's losses were a factor in the bank being forced to obtain a second federal bailout, and contributed to a 93 percent drop in its share price over six months. The takeover closed in January 2009.

The second shareholder group has complained that the New York settlement was the result of a collusive scheme between directors trying to avoid a big payout and lawyers hoping to win a big fee award.

They also said the payout is too low in light of the damages suffered and $500 million of insurance coverage available to the directors.

Such arguments are best raised in the settlement approval process, Castel wrote. At this point the parties here have executed only a memorandum of understanding.... A review of the merits of any settlement is premature.

Michael Schwartz, a lawyer for the Delaware plaintiffs, did not immediately respond to requests for comment. Bank of America spokesman Lawrence Grayson declined to comment.

The New York settlement would resolve claims that Bank of America directors breached their duties for having misled shareholders about Merrill's soaring losses and hidden how Merrill was paying $3.6 billion of bonuses despite those losses.

Among the defendants is Kenneth Lewis, the onetime Bank of America chief executive who engineered the takeover.

Earlier this month, Delaware Chancellor Leo Strine put the case before him on hold, as he denied a request by shareholders in that case to block Castel from reviewing the settlement.

Castel also oversees nationwide shareholder litigation against Charlotte, N.C.-based Bank of America itself over the Merrill purchase, where damages could be much larger.

Lead plaintiffs in the New York case are the Hollywood Police Officers' Retirement System in Florida, and the Louisiana Municipal Police Employees Retirement System.

Both cases are derivative lawsuits brought on behalf of Bank of America. Payouts would go to the bank, not to shareholders.

The cases are: Bank of America Corp Stockholder Derivative Litigation, Delaware Chancery Court, No. CA4307; and In re: Bank of America Corp Securities, Derivative, and Employee Retirement Income Security Act (ERISA) Litigation, U.S. District Court, Southern District of New York, No. 09-md-02058.

(Reporting by Jonathan Stempel in New York; Editing by Gary Hill and Michael Perry)