I would effectively like to switch from a case-sensitive journaled filesystem to that of a case-insensitive journaled filesystem. Booting into Lion's recovery allows me to format the drive as I wish, however, no matter what I choose Time Machine will always reformat it as a case-sensitive journaled filesystem (which makes sense). My question is, how can I make this switch?
The correct answer (after several days of experimentation) was to remove all ambiguously named files that would have a conflict. Then using another admin user, restore the original user using migration assistant. If you don't remove ambiguously named files, migration assistant will move what it can and then fail at some point giving no indication that it actually failed. You'll be without data and you won't know what.