I'm not a lawyer, so I'm (probably) wrong, but my guess is that there are very many people who have been scammed in a similar way. Potentially enough for a class action lawsuit.
If there are any lawyers in here, please chime in. If a class action suit is an option, it would be far more powerful than just you suing.
Good for you! They enabled this entire situation by allowing your item to be purchased with the PP credit program extended to the buyer then refunded the buyer violating their own brokered return agreement between you and PP.
I hope justice is swift and in your favor, I don't see how they could prevail here with all the evidence you have.