That is one messed up situation. Sorry to hear this. Have a few questions.
Have you reached out to the buyer to get his side of the story? It might provide you with something that you could use against him with paypal and his financial institution.
Many things here do not make sense but has paypal explained to you how they can place your funds on hold for Refund Not Received when there is no record of such a request having been made? It must have been that the buyer contacted his financial institution and opened a dispute. If so he has lied to them because there is no proof that he has attempted to return the merchandise, at least as far as you have seen.
Having paypal, who has no skin in the game, fight on a seller's behalf is a bit scary. They certainly do not sound like they are advocating too hard for you given the proof you have provided them. The financial institution should accept that as this being a clear case of fraud on the buyer's part.
And yeah as a public service to other sellers who are reading this, you might want to let them know who this dbag is.
Good luck,
Chase
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