It's a month-to-month service, so they're asking for a refund on 12 billing cycles. The TOS is clear that there are no refunds for services rendered. I try to be as accommodating as possible, but this just seems absurd.
Yeah. I would try and compromise with them. Maybe offer some of their money back, but in this case the company doesn't owe them 12 months of refund because they forgot to cancel for a year.
If their site was up and having visitors, did it change at all in 12 months? Whats the traffic stats like?
Most importantly, is this money worth the risk of possibly losing customers if this guy is loud?