Sweet khuk. I'd put some greenbacks on the barrelhead for that fine piece by Sher. It would take lots of abuse to render such a fine blade unsalvagable.
With regards to this situation, it seems to me that the HI policy is to act honestly and straightforwardly, and make things right. With that said, this is how I imagine the situation would work if I were the end buyer:
I receive a khuk that I paid for. I play with it for a little while and figure out that it's not satisfactory. I contact the seller with my issue (actually, I would try to fix it, but I've been hanging around the Cantina for a while). Ideally, the seller would take it back, try to fix it, and return it to me in better condition (unless sold in "as is" condition, in which case I would expect nothing.)
If the seller was some hack moving stuff (not you Danny, but you get good and bad on EBay) and didn't want to deal with me, I would contact HI directly. I'd give them a chance to fix it. If they were unable to fix my knife, or provide me with a satisfactory replacement, then I'd ask for a refund.
Honestly, I'm more mellow than most people, and I have lots of experience with Uncle Bill and HI, including a quick replacement. So perhaps it's not unreasonable for Geoffrey (?) to ask for a refund immediately. Note to you, if you read this - try and get a good HI, either by exchange or letting someone with more experience sharpen it. It was a bit premature to look for cash. I hope you join the Cantina and learn lots more about knives in general and khuks in particular. Obviously, you've ruffled some feathers, but it's forgiveable.
In the end, I would ask for the blade back. You can't give a refund site-unseen, or I could call up and say all my HI blades failed catestrophically, and I want n dollars back. If it is an HI, and there is something wrong, he deserves a refund. If it's still in saleable condition, he should get a refund - not on merit, but because it builds good will without significantly taxing HI. If he's just fishing for cash, it's pretty pathetic to return a $50 blade to get it, especially since shipping will eat up a decent fraction of that.
The fish is that he didn't mention contacting the seller. That should be the first recourse. Props to Dan and others for taking the HI warranty upon their own shoulders.