I'm not in any way trying to rub salt into the wounds of the OP... however for the sake of EVERYONE who reads this thread please read the paypal terms of service. No one ever does until it is too late.

Ineligible items and transactions

"Your sale is not eligible for coverage under PayPal’s Seller Protection program if:
It involves an item that you deliver in person, including in connection with a payment made in your physical store, unless the buyer paid for the transaction in person by using a PayPal goods and services QR code.

It involves a payment sent using PayPal’s friends and family functionality."

So to be clear, it isn't merely the friends and family faux pas that is screwing over the seller here. It is also the fact that the seller protection policy is pretty narrow and basically requires shipment of goods.

Now I'm going to provide help to the OP:
[note that I'm not sure the OP would be successful at arbitration if he/she violated all the terms of service however it may be the best way to get a conversation going... which is better than nothing]

If a dispute arises between you and PayPal, acting as either a buyer or a seller, our goal is to learn about and address your concerns. If we are unable to do so to your satisfaction, we aim to provide you with a neutral and cost effective means of resolving the dispute quickly. Disputes between you and PayPal regarding the PayPal services may be reported to customer service online through the PayPal Help Center at any time, or by calling (888) 221-1161 from Mon-Fri 5:00 AM to 10:00 PM PT and Sat-Sun 6:00 AM to 8:00 PM PT.

https://www.paypal.com/us/webapps/mpp/ua/useragreement-full#agreement-arbitrate