I've read this whole thread and am not going to comment on the integrity, ethics, etc. of the buyer or seller. I like practical solutions, and I present one here.
If the initial sale price was indeed a great deal, or even a fair deal for the buyer (assuming there was nothing wrong with the knife) then he could have, and even still can, sell it and not lose any money. We have heard from many BF members, some that are even knife makers, that there is nothing wrong with with the micarta on this knife (this is the only perceived problem with the knife, no?) It sounds like it would be very easy to clean up, and there is nothing unethical about doing that. It's clear the buyer did not realize this initially, but now that he has been educated (just as I have) about the nature of micarta handles, accept it and move on gracefully. If you don't believe the info the members have provided, do a little research to verify it. Once you realize it is normal behavior for micarta, this whole dispute is baseless. Wouldn't this have been easier than a Paypal claim?
Why let our egos get in the way of doing what's in our best interests?