Quoted from ViolinSteve:

Box was damaged. Buyer didn't inspect to see if machine was damaged. Delivery refused. Claim filed. Machine returned. Lo and behold...NO damage to machine. Not a scratch.

Seller did nothing wrong. Stern shouldn't even be contacted unless machine has QC or play issues.
My take on this: Distributor did everything right, even coddled this newbie. Buyer is unreasonable and being difficult.
Recommendation: I WOULD STAY AWAY FROM THIS BUYER AND SELL YOUR GAMES ELSEWHERE.

Quoted from ForceFlow:

It sounded like since the buyer filed a claim with paypal, it effectively froze the funds pending paypal's review of the situation. So, the seller wasn't able to issue a refund while paypal had a hold on the buyer's funds.

Quoted from Rdoyle1978:

Wow. As a small business owner myself, I TOTALLY get the situation. This is why home building vendors don't usually deal with the public. Way too much hassle, and the rules are different for big ticket items vs (for example) a Yamaha stereo bought at the nearest big box store. What a pain - for both of you.
I will say though that this post from Kurt makes me want to buy from him. Good distributors are hard to find, in any industry.