My head hurts from reading this situation. If the DC shows that the card was delivered to a zip code other than what is on the paypal account, then paypal would have sided with the the buyer if he sent a flag sooner. Hope the OP used a credit card with his paypal account so that he can file a chargeback.
I'm sure there are two sides to this story.
Lesson: If you are going to buy from someone with low feedback, make sure to use paypal buyer protection 2-3 weeks after the initial transaction. Too many shadiness going on with zero feedback folks. Heck, even folks with over 100 feedback pull shady stuff here.