On the eve of a hearing to determine monetary sanctions, Sovereign Bank settled the underlying discovery-abuse claims with property developer 400 Walnut Associates, which is going through Chapter 11 bankruptcy.

The bank agreed to pay $150,200 to 400 Walnut Associates and turn over all of the documents that it had been subpoenaed to show as part of the settlement filed in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania the day before the scheduled hearing.

"Having rarely seen a more egregious abuse of the discovery rules, this court holds Sovereign in contempt under Rule 45(e) and shall impose both monetary and non-monetary sanctions upon it," said U.S. Bankruptcy Chief Judge Stephen Raslavich in his opinion issuing sanctions against the bank last summer.

At that point, Raslavich stripped Sovereign of its attorney-client privilege for certain documents and ordered the bank to turn those papers over to 400 Walnut Associates.

The monetary sanctions were to be issued after the hearing that had been scheduled for Thursday. However, according to the settlement, Sovereign agreed to pay the amount that 400 Walnut Associates calculated that it had spent as a result of Sovereign’s responses to the subpoenas — $150,200.

Earlier this year, 400 Walnut Associates indicated that it planned to seek punitive damages as well, but gave up that pursuit as part of the settlement agreement.

The property developer, which converted an old office building into apartments about a decade ago by taking out a $12 million loan that was later refinanced for $13.125 million, filed for bankruptcy in 2010 and, soon after, faced allegations from the company that had bought its loan from Sovereign that it was in default, according to court papers. However, 400 Walnut Associates responded that it wasn’t in default because it had been operating under a forbearance agreement that it reached with Sovereign several months before filing for bankruptcy.

The property developer then served a subpoena duces tecum on Sovereign seeking documents related to the loan and forbearance agreement, according to court papers. That agreement was allegedly made at a meeting in early 2010, following Sovereign’s submission of a mortgage foreclosure action in the Philadelphia Court of Common Pleas, an action that it abandoned after the meeting, according to court papers. Counsel for the bank had been tasked with putting the agreement into writing, according to court papers.

The property developer later filed a second subpoena duces tecum and Sovereign failed to fully comply with both.

"Whether the forbearance agreement existed and whether there is sufficient documentation of it to satisfy the Statute of Frauds have been and, following the issuance of this decision, may continue to be pivotal issues in this proceeding," Raslavich said in his opinion imposing sanctions last summer.

"Had Sovereign properly complied with the subpoenas duces tecum, the course which this adversary proceeding has taken may potentially have been entirely different," he said.

The current settlement agreement applies only to the dispute over Sovereign’s response to the subpoenas.

Following the discovery that will follow the settlement agreement, 400 Walnut Associates will likely ask the court to let it file an amended complaint in its adversary action, which stems from what it alleges is a breach of the forbearance agreement, and add Sovereign to the defendants, said Steven Coren of Kaufman, Coren & Ress in Philadelphia, who represented 400 Walnut Associates.

Walter Weir Jr. of Weir & Partners in Philadelphia represented Sovereign and couldn’t be reached for comment.

Sovereign conditioned its agreement to the terms of the settlement on the court’s agreement that no further sanctions would be imposed. "No further amounts will be payable by Sovereign and no further sanctions shall be imposed by the court in connection with such discovery matters," according to the settlement.

Raslavich approved of the settlement agreement Thursday.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the nine-page opinion in In re 400 Walnut Associates, PICS No. 13-0506, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •