Google App Engine refuses to stop charging me. wat?

"Downgrading your quotas to those of a free app" is not the same as converting it to a free app. Presumably they do that so people with unpaid bills can't keep on burning mondo CPU and disk space (which it doesn't sound like you were doing, but that's almost certainly the reason for the policy).

When they tried to bill your (expired) credit card you already owed them money. They want you to pay it before they'll let you access that account.

I guess I don't see the problem here?