Can apple really take my iPhone away?

Long story short my husband bought a 340$ paperweight off of some shady people on offer up, when a Sim card is inserted it says no service. A nice guy at our carriers local store said to go to the apple store and get it exchanged for credit. Even better the phone is under warranty so we can exchange it. However we hit a bump when the apple "genius" said we can't exchange the phone right away because our particular phone got flagged to go to the "depot" they couldn't tell us why. At some point the guy said if they used 3rd party parts they're going to keep the phone and they do this as a deterrent. Can they really just take peoples property like that? There is confusion about this just because I asked again and he said something different, I couldn't get clear answers. At the least my spouse has learned a 340$ lesson in listening to one's gut, and at most it might work out and he gets a nice phone. I just can't believe that's legal.

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