Firstly, being in CAPITALS I find your opening post hard to read.  Please try to avoid the use of CAPS unless highlighting a particular word or phrase.  Use of CAPS is also considered as SHOUTING in forums on the internet.  You will get more help by avoiding caps.

Secondly, I think you need to phone PayPal and explain your case.  Ask for the name of the person you speak to in case you need to refer to the conversation when speaking to anyone else at PayPal.  If you do not get satisfaction from the first person you speak to you should ask to be transferred to supervisor.

Remember to remain calm when speaking to them.  You may need to go through the facts a few times with them but keep your objective in mind i.e. getting them to side with you because of the facts.  I know from experience that this can be frustrating, but you put yourslf in the PayPal persons shoes, you wouldn't like to be shouted at all day, and when someone comes along who speaks to you respectfully and actually calls you by name you are likely to be more receptive.

Come back here and let us know how you go with the phone call, and to update us.  There will be others with more experience than me who come along and give you advice as well.  Good Luck.