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Sometimes instead of sending to John.Doe@example.com our sendmail and web app sends to John.Doe@local.machine.com. And of course the mail is undeliverable because user John.Doe does not exist on our local machine.

Subject: Undeliverable: Your account has been created

Your message did not reach some or all of the intended recipients.

      Subject:  Your account has been created
      Sent: 10/6/2011 9:24 AM

The following recipient(s) cannot be reached:

      John.Doe@local.machine.com on 10/6/2011 9:24 AM
            The e-mail account does not exist at the organization this message was sent to.  Check the e-mail address, or contact the recipient directly to find out the correct address.
            < local.machine.com #5.1.1 SMTP; 550 5.1.1 <John.Doe@local.machine.com>... User unknown>

The sendmail log shows

Oct  6 09:24:16 MACHINENAME sendmail[11689]: p96DOG1G011689: <John.Doe@local.machine.com>... User unknown

Sendmail is set to relay to an Exchange server and it seems to be mailing okay internally and to gmail. It looks like this problem: Linux Sendmail server misdelivers mail to my own domain? and running dig MX example.com seems to return a good record. Any ideas?

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It looks like the user still gets their welcome email. Just that the administrator on the site also gets an undeliverable for the same email. –  sapark Oct 6 '11 at 18:14
Added define(LUSER_RELAY',local:root')dnl to return undeliverable mail to unknown users to root instead of to sender, per serverfault.com/questions/274211/sendmail-dsn-user-unknown –  sapark Oct 6 '11 at 18:51
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