Option 1 -> "Fallen down" means to physically fall or to fail at something, not to have a disagreement.
Option 2 -> "Fallen out" is a phrasal verb meaning to have a disagreement or quarrel with someone.
Option 3 -> "Fallen into" means to enter or get into something (like a trap or habit), not to have an argument.
Option 4 -> "Fallen by" is not a standard phrasal verb used in this context.
Hence, Option 2 (out) -> "Fallen out" is the correct phrasal verb that means to have a quarrel or disagreement with someone, which perfectly fits the context of two friends having a dispute over a minor issue -> correct