I’ve had to deal with this issue a number of times so in case I need to again here the handy dandy solution.
The problem is that mail destined for bad recipients goes to the Badmail folder in mailroot. When SPAMMers impersonate senders using your domain this can fill quite quickly. Yesterday, I was confronted with a Badmail folder with almost half a million emails.
What to do?
I created another folder called Badmailnew. I took away all write permissions to this folder from the system. In IIS in the SMTP properties you can select the folder you wish to use as Badmail. I pointed it to this new folder. Since the new folder does not allow the system to write the bad mail cannot be placed there.