This is on a W124 with the floating single piston calipers.

The pedal went to the floor at one point and it was due to a bad line. I replaced that and was not able to get a firm pedal but the car did stop well enough. Every weekend for the past month I've been trying to fix it and bled the brakes a dozen times. I finally went around and clamped all the soft lines, with the proper tool, and found the problem was coming from the front left. Upon further inspection I can see the pad moving back and forth causing this problem. I assumed it was a bad caliper and bought another. It is still doing it with the new caliper and the pedal feels fine if I have a helper clamp that corner so its something messed up with the new caliper.

To clarify the pedal feels fine with the entire brake system hooked up and the one line clamped near the caliper. With the caliper off the car I can actually see the piston move out and then back into the bore. This sounds like air in the piston but after beelding gallons of fluid though it how can that be?

Caliper piston retraction is normal and desired. The piston seal distorts when the piston moves forward then draws the piston back slightly when hydraulic pressure is removed. This keeps the brake from dragging.

A few things.

Are the brake pads flat? They will sometimes wear on a taper causing a soft pedal.

Are the bleeder screws at the highest point of the caliper? It is usually possible to swap calipers left to right but the bleeder will end up on the bottom.

Make sure the caliper can slide back and forth on the mountings. If the sliders are stuck the caliper mounting and rotor will flex causing a soft pedal. ( This only applies to single piston floaters not dual piston fixed calipers. )

It looks like the sponge was actually coming from a hard line. I finally just replaced them to rule that out and now they feel ok with the car off and I probably just have more bleeding to do.