Last time something like that happened to me, I negotiated a fair price with the seller. The item arrived in less than advertised mechanical condition and I asked to return it. The seller asked for a fair price instead. I made an offer and he refunded the difference in Paypal. I got a deal and he got rid of his broken item and avoided the hassle of a return and re-listing.
If it was me in your shoes, I would have returned it rather than fixing it. But you want to keep it, so at this point I'd negotiate a fair price with seller. The seller doesn't have the item or the money and from your story, they are probably simply out to cover their expenses from the upstream sour deal.
This is the kind of stuff that makes me really dislike using eBay. It adds alot of stress that, in the end, outweighs the benefit. I hope your expense is still a good deal in the end. Can you please post when this gets resolved? You got me real curious how the story will end.
-pmc