I have proxy arp enabled on the outside interface.
And something more strange.
If I look in the IP hotspot hosts, I see denied addresses that are from within the linksys router that is the ppppe client.
If I‘m in your situation I will use separated interfaces for Hotspot and PPPoE server , put both on same switch and don’t assign IP for PPPoE Ethernet interface.
so should I run two cable to every floor in the building, two switches on each floor and patch in the customer to the phone closet one or the other depending if the have a router/and phone service or not?
Back to reality.
Your idea of separation might work if I were to only logically separate the interfaces. I will try to add a bridge, move put only the inside interface in the bridge, put the hotspot on the bridge interface and leave the PPPoE on the ethernet.
Update:
It seems to only be two client router, and my router that are doing this. Both are linksys but different models. WRT54g version 2 and a BESF8R.
it seems the problem was with the linksys client routers. I replaced (the besf8r) one with a rb and the other (wrt54g) was fixed with a firmware upgrade.