This Process can go on to court, I have been in a same situation a while ago. I was a ebay seller and I did dropshipping. When people purchased the item, I would turn around and ordered the item from the company.
Little did I know, the company scammed me and the money was sent to the company. I contacted everyone about this and some people did not believe me so, they decided to contact paypal. Paypal limited my account because I could not ship the items. But believe it or not, paypal resided with me because I had proof that the dorpshipping company scammed me. But Paypal did not tell them anything so, they went to their local Police department and sign an affidavit.
Next thing you know, the police was at my door step. Paypal gave them my address and all the transactions. They came in for questioning about my online activities so, I showed them everything and how the dropshipping company scammed me and the people. So the police could not do anything because I had proof that the company did scam me and If I did not have proof, they would have taken me away right there. So, instead of the people suing me, they sued the company and they won (people).
It can happen here, go to court or contact the police, they will help. Individuals that have stolen over $300 is a felony, thats what the police told me. I was scared, but I knew I did right. Thats why I do not deal with dropshippers any more. So even if Paypal resides with the buyer, you can take it further and thats what the ebayers did.