The suit, filed on Monday in San Francisco, names Dwolla, its CEO Ben Milne and COO Charise Flynn and five more unnamed people as defendants, alleging racketeering, false advertising, breach of contract, intentional misrepresentation and defamation.

When it closed its doors last month, TradeHill's CEO Jered Kenna revealed in a blog post that "one of our payment processors removed over $100,000 dollars from our account without notice".

In a press release, TradeHill has confirmed that the processor is Dwolla, explaining: "In the complaint, we allege that Dwolla fraudulently reversed nearly $100,000 in supposedly "credited" transactions and unjustifiably blocked an attempt by TradeHill to transfer $70,000 of its funds from Dwolla's control."

The complaint says that TradeHill entered into a merchant-customer relationship with Dwolla last June, picking the start-up over rivals such as PayPal because of its low transaction fees and because it "heavily advertised that it did not 'chargeback', that its transactions were 'as good as cash'".

Chargebacks allow payment processors to reverse transactions if a customer complains that they did not receive goods or services paid for from the merchants.

According to the suit, without TradeHill or Dwolla knowing, a "number of customers" were buying TradeHill services through Dwolla and then, despite getting what they paid for, going to their financial institutions to demand a chargeback from Dwolla.

Dwolla, according to its own 'no chargeback' policy should have absorbed the costs, argues the suit, but instead reversed 'credited' transactions to 'pending' in TradeHill's account without any notice.

By 10 July, TradeHill became suspicious as credited transactions were not tallying with its internal sales figures and built a program to compare transactional histories to confirm the issue. When it tried to contact Dwolla about the problem, TradeHill claims it was ignored.

TradeHill argues that by reversing a total of $94,878.72 and blocking attempts to remove $70,000 from its account, Dwolla has caused it significant hardship. The exchange has operated at a big loss since July, with staff going unpaid before the whole enterprise was shut down last month.

It also says that the suspension of operations has seen it lose rights to the valuable bitcoin.com, bitcoin.co and bitcoin.co.nz domains which had been obtained by handing over $1 million in equity to a third party.

In a statement given to BetaBeat, Dwalla says that "if served, we will vigorously defend all allegations of wrongdoing in the traditional venues of the judicial system. What we will not do is provide specific comment on specious allegations made by those who have a self-serving interest in seeking publicity."