https://www.paypal-community.com/t5/About-Settings/Selling-Bitcoin-is-Against-PayPal-Policy/td-p/1215793^so apparently performing any sort of currency exchange is actually against the paypal's terms and conditions and using bitcoin is no exception. Paypal has never been bitcoin friendly in the past, anyways. This plus the fact that they seem to limit every account that touches the slightest of their terms and conditions, makes them one of the worst choices for crypto exchanges.
You could try filing a lawsuit, but it'll be costly and probably way more than $1k since you're battling a big company. Plus there has been plenty of cases in the past involving locked funds and suspended accounts, and paypal is still up and running. Doubt you'll do any damage tbh. Plus, they'll just claim that you violated their T&Cs. What would you say in that case?
I'm not saying that you're in the wrong, i hate paypal just as much as the next guy, but hey, you just gotta accept some things.
and seeing how Paypal has an arbitration clause, you cant file a class action lawsuit against them.
When you signed up for the account, you had to agree to that clause. Your only recourse against them is to go to arbitration... and there you will loose because currency exchange is against the rules on paypal, again that you agreed to follow.
I really am sorry they screwed you, but there is almost nothing you can do about it.