One of the reasons that small startup are loathe to announce big funding rounds is that plaintifs and patent trolls always come out of the woodwork. Payment startup Dwolla, which recently closed a $5 million round of funding led by Union Square Ventures, is now defending itself against a $2 million lawsuit from defunct Bitcoin exchange Tradehill, as first reported yesterday by Betabeat.

Tradehill alleges that it went out of business in large part because of “chargebacks”, payments that Dwolla cleared and then took back. It says that this fraud amounted to $94,000 in losses, and that Dwolla also refused to release an additional $70,000 of funds it had in a Dwolla account. How does that add up to $2 million in damages? Tradehill says that these losses contributed directly to the company’s bankruptcy and forced them to sell valuable domain names for which they had traded $1 million in equity.

Dwolla’s CEO Ben Milne released a statement last night saying that it has not been served formal notice, and that Tradehill is attempting to smear it in the press:

First and foremost, it is important to note that neither Dwolla, nor any of its management or investors, have been served formal notice of any potential lawsuits. It is also noteworthy that a party making unfounded allegations would likely notify the media of litigation prior to advising the party that it says caused it harm. That said, if served, we will vigorously defend all allegations of wrongdoing in the traditional venues of the judicial system.

It does seem that a suit was filed in California, a copy of that can be found here.

The crux of the case seems to be Dwolla’s policy around chargebacks. In his statement Milne said that they have always been clear about how this was handled. But in a blog post he wrote on March 30, 2011, Milne noted to merchants that, “Remember, these are cash-based transactions! No credit card fees, chargeback concerns, or signing necessary!”

A bitcoin wiki says that in June of 2011, right as things were falling apart with Tradehill, Dwolla changed their terms of services to include: “The receiving party of a transaction may be subject to chargebacks occurring within the account if claims are made by the sending party or by the financial institution. In the event fraud occurs, funds may be reversed and arbitration will begin with both parties.”