This is the way many providers that offer recourse settlements handle things. They have data showing when they cut off a business from processing credit cards

This is the way many providers that offer recourse settlements handle things. They have data showing when they cut off a business from processing credit cards etc they may receive claims from customers who have already paid whose money they are either holding or have forwarded. If they are holding it they refund that customer, and business can ask for payment using another method. If they are not holding funds, they run into an issue of asking merchant for money (which is difficult to collect). So most providers of this type when making a decision to end a business relationship hold onto the funds for a while to let everything settle. This is not unique to paypal. Some providers don't hold funds if payor has no recourse. You usually need to be settling with what are called "good funds" for that to be the case, then merchant is paid out usually within 1 day under all circumstances. A fair number of B2B wire type clearing operations work like this. I'm just explaining what happens. They don't generally closely evaluate the reasons or likely outcomes of account closures, and there is enough fraud and profit motive / cost cutting in system that the rules tilt pretty heavily against merchant. That said, if OP is not lying and they really do confiscate the funds there will be an issue for them. Especially individuals, they'll send the unclaimed funds to the state generally even if not claimed by the person.