In the other recent paypal PR debacle I don't think paypal deserved the level of vitriol that was leveled at them. Regretsy screwed up by operating in a way that would have caused most banks to shut them down, but it was horrible customer service on paypal's part that turned it into a disaster.
For this I would like to hear more details of the story but I don't see how paypal could possibly be in the right if the facts as presented are in any way accurate, this is abhorrent.