[hkhanna]

None of this is legal advice, but I'm a student of negotiable instruments like checks and the history they have in our system of law and finance.

Checks are negotiable instruments governed by UCC Article 3, which has been adopted in all or nearly all states in the US. The drawer of a check, in this case Paypal, is normally liable for when an impostor presents the check or when their employees forge indorsements in the name of the payee. The thinking is that the drawer is best positioned to protect against that kind of fraud.

Depending on your state, you can probably take them to small claims court over this on the theory of a fraudulently indorsed instrument. You might also have a claim for breach of contract for failure to return the balance on the account, although you'd need to show how their failure to give you your money breaches a contract or statute, and that might be hard to do without a lawyer. The claim for fraudulent indorsement of the check is probably cleaner and less fact intensive.

Small claims is really accessible to non-lawyers, and PayPal probably won't even show up. You could get a default judgment and then, if you really wanted to, execute that judgment against their bank, which you can probably see from the copy of the cancelled check.

Again, none of this is legal advice! It's going to be time consuming and maybe not worth $270 but if you have the time and will, I'd say go for it.