Yeah the only good way to use PayPal is by using a "real" credit card through PayPal to make your purchases. I am not sure if the debit credit cards hold the same protections as "real" credit cards.
I am not sure how the small claims court would work. My best advice on that would be to contact your local court house and ask them if they would prosecute the claim or if you would have to file one in the home state of the defendant (ie Parker).
That is best thoughts on that.