I can recall reading many PayPal horror stories, but as I recall, they were all accounts frozen and then usually closed and paid out 6+months later. This story and others in comments suggest PayPal has decided not to pay out the frozen accounts anymore. Damages from freezing the money for 6 months are real, but may not be realistically legally actionable; damages from not paying the funds are clearly actionable.

Before Paypal launched, only companies had relationships with payment processors and could directly accept major credit cards. Individuals had basically nothing.

Paypal was a huge catalyst for online auctions and small business, and it took took time for behavior like this to develop. And as others have said, they worked hard to not be a bank.