two things are at fault.

1. the pad sander generates a lot of heat especially if it's the kind that doesn't have a dust bag. Even so, they generate heat. A Random Orbital is better since it spins at a slower speed and has larger dust openings.

2. the varnish wasn't completly dry. It can seem to be dry, - dry enough for a second coat but still soft for sanding. When I'm at that stage and want to push ahead, I go for wet (hand) sanding. It will smooth out and get the surface ready for the next coat without being completly dry.

It actually takes a long time for varnish to get hard enough to create dust when sanding. Or... many times you can lightly sand the surface - use the sterrate sand paper sold at boating supply houses or some woodworking stores. It's lubricated and releases it's abrasive as it goes along. It won't clog but will go flat instead. Use a light touch.

You can actually smell the solvents being released for weeks after a varnish job.