This is a multi-part question: First, I would like general input on how a catalytic converter should be evaluated for signs of failure? For example, does testing a CAT to ensure it doesn't have internal damage require the 02 sensor to be removed? Second, I would like more specific answers to determine what my options are for lower cost repair/replacement, if possible.
Here's the relevant background: A "Star certified" auto repair and smog shop was called on to diagnose a problem with a Subaru Outback (2004, AT, EJ259 engine type, 4 cylinder). The engine suddenly lost power (couldn't go beyond ~20mph). Customer read the check engine lights and found the following: P0731, P0638, P2109, P0420. Prior to the loss of acceleration there was an intermittent P0420 that started about two months after the head gaskets were replaced in 2019 by a different shop. (Notably, the car had two prior catalytic converter replacements for this code under dealer/factory warranty, the most recent in 2016. Less than a year ago, despite intermittent P0420 codes, the car passed a smog test and wasn't due for another year.)
The Star-certified shop that took the car in for the aforementioned codes had replaced an accelerator pedal assembly about three months earlier (a similar issue with loss of acceleration had occurred). Assumption on the part of the customer was the pedal assembly had gone bad but instead of it being replaced, customer was told by shop that a new throttle body is required. Before dumping money into the throttle replacement, at a cost of ~$1,500, customer asks the shop to investigate the intermittent 0420 code to get a better understanding of what else may be wrong with the vehicle. The shop reported that the 02 sensor was cross threaded and that there were "exhaust leaks." Shop indicated to customer on a Friday that if the CAT was bad, it may need to be replaced. Customer agreed to have shop "take a look at it," but shop failed to point out that it would be necessary (or was it?) to remove the 02 sensor to answer the customer question of whether the CAT was any good. (Customer concern was that the CAT may have partially melted back in 2019 when the head gaskets failed since the code had appeared not long afterward.)
Shop calls customer on a Monday to report that they removed the 02 sensor mounted on the passenger side CAT and now they need to replace the CAT at a cost of ~$3,500 because the threads stripped out. Customer asks if the thread damage can be repaired in the event the internal condition of the CAT otherwise checks out. Customer is told shop doesn't know if the CAT is any good because they were unable to test without the 02 sensor re-mounted. Customer is also told that an attempt to repair the stripped out threads on the CAT using a bung — or even a compatible used/salvaged part — would constitute an illegal modification, which may threaten their Star license. Shop informs customer that even if a CEL did not illuminate following reattachment of the 02 sensor to a bung by a muffler/exhaust shop, the car could fail a future smog if such a repair were observed. Three weeks later, CAT/exhaust components remain in pieces because shop also reports that a one-time use tap will be necessary to reattach the pipe into the cylinder head. Shop leaves customer to figure out what, if any, lower cost options there may be to address the CAT replacement (hence this post).
Now for the related questions: Is it true that the shop was in no position to evaluate the CAT before the cross-threaded 02 sensor came off? Next, is it true that the customer cannot legally install a used/salvaged CAT, assuming a compatible part can be located? Additionally, is it true that a CA customer will fail a smog check if an exhaust shop repairs a CAT using a bung? Moreover, is there any relation between the P0420 code and the other codes indicated here? Does the customer have an option for a lower cost solution that is legal State of California? (For example, are there aftermarket options?) And lastly, does the shop that stripped out the threads while removing the 02 sensor have any obligation to repair/replace what they broke so that the customer is not left holding the bill for new damages?