I’m not sure which one would get the upgrade, but there is no way person B is entitled for a refund for their “special seats”. This isn’t even a point to debate imo!

How entitled must one be to claim compensation for seat selection after having been upgraded by the airline?

Like they did not only get a better category of seats, but also better service. I would argue if that refund was claimed that the person if they wanted to sit in their seat they paid for could have rejected the upgrade and switched with the person sitting in their originally reserved seat.