Huge thanks to the FWS Admins for figuring this one out!!
It appears that a user's Favorites are stored in a secret/hidden group and this is what is triggering most of the errors where the recipient has the correct group permissions. There are other cases where not all sharing is immediately apparent, resulting in similar a 'hidden group' scenario, but these are less common.
If your Org has experienced this issue, please request to be attached to the bug so that it can be prioritized for a fix as soon as possible. Thanks!
BUG-000149718: Unable to change ownership of an item if favorited by another user.