Yes, they should’ve been up front and disclosed this. OTOH, they thought they could do a trade, and got burnt. They’re not going to even initiate a trade unless they know the buyer would qualify.
Honestly, there’s not much he can do here if dealer B isn’t going to trade the car to dealer A other than trying to buy from dealer B direct. He can complain to the store GM, and the GM might be able to ask finance to pull the app from the bureaus, so it doesn’t show. He’s not going to get any type of financial compensation, if that is what he is looking for. However, if he buys anything within the next 30 days and runs his credit again, theoretically, it shouldn’t matter to his score, as FICO is supposed to treat multiple applications in 30 days as rate shopping, and not ding your score further.