Local developer Brian Anderson failed to block a foreclosure auction of The Lotus at Diamond Head hotel in Waikiki yesterday after a drawn-out legal battle was extinguished in U.S. Bankruptcy Court.

The 51-room boutique hotel formerly known as the W Honolulu-Diamond Head was sold to Unity House, a local nonprofit labor welfare organization, for $8.5 million.

Unity House outbid First Hawaiian Bank and Central Pacific Bank. The banks had loaned Anderson money secured by the hotel.

The purchase by Unity House is subject to confirmation by a Circuit Court judge at a hearing expected in about 30 to 40 days, at which time anyone willing to bid at least 5 percent more could reopen the bidding for the property.

In the meantime, the hotel managed by Castle Resorts & Hotels, is continuing normal operations.

Anderson, who bought the hotel on a mix of fee-simple and leasehold land for $8 million five years ago, had tried to save the Lotus from auction by filing for bankruptcy in May with the intention to hire a broker aiming to sell the property for $14 million.

"We sought protection under Chapter 11 to give us time to properly market the hotel and thereby protect our equity," he said in a May interview.

The bankruptcy filing by Anderson's Anekona W LLC blocked a June 12 Circuit Court foreclosure auction. But Bankruptcy Judge Robert Faris dismissed the bankruptcy case July 29 after Anderson and his attorney didn't meet a deadline to respond to a motion made by Central Pacific asking to proceed with a sale. A new foreclosure auction was scheduled for yesterday through court-appointed commissioner Richard Emery.

Anderson, in court filings, blamed his attorney for mishandling the bankruptcy case, and on Monday through a new attorney sought an injunction from Faris to prevent yesterday's auction.

The developer, who lost Waikiki's Ilikai hotel to foreclosure sale in May for far less than he owed on the mortgage, maintained that the Lotus was worth more than the $11.3 million he owed on the property.

An appraisal ordered by Central Pacific from local appraisal firm The Hallstrom Group at the end of last year pegged the value of the hotel on Waikiki's Gold Coast at $10.2 million, according to court filings.

Anderson cited a February appraisal commissioned by Unity House from commercial real estate firm CB Richard Ellis that valued the hotel at $16 million. Anderson listed the property for sale at $14 million through real estate firm Colliers Monroe Friedlander.

Anderson also touted interest from Honolulu home health agency Wilson Homecare to operate the property as a senior-living center for 20 years.

But First Hawaiian said Anderson's claim that he can sell the hotel for more than he owes is speculative, and that the developer will have more time to arrange a higher-priced sale before the foreclosure confirmation hearing.

Judge Faris rejected Anderson's late-hour appeal, and let the auction proceed.

Jim Boersema, board chairman of Unity House, said the organization that occasionally invests in local real estate hasn't determined how it will use the property if it is confirmed as the higher bidder. "We felt this was a solid investment," he said.