WereAlpaca

You need to fix your sprites so the first frame is a standing frame. Look at the default intersect sprites so you know the order.

Lower your sprite to the bottom so there is not 32 pixels below him, that should fix it. Maybe a space of 2-3 pixels to allow for robe sprites or anything that goes lower than the feet.

Edit: It works horizontally because it calculated 8 pixel out from the center line, while it calculates from the bottom of the sprite vertically. Hope this explains why it works sideways and not vertically.

This is the proper way.
Open the class editor. Choose the class you want to edit from the left list. Check mark whether or not the sprite will be female or male. The dropbox below the female option is the folder "Entities" in the resources. Put your paperdoll in that folder, then you can select it from the dropbox. Once you have the gender and sprite chosen, click the "Add" button. Voila. Remember to relaunch server and editor when you added files to your resources folder. Let me know if it's still unclear.