The sub can only be ignored for combat movement purposes, Jimmy. Because of the other defending units (in this case, scrambled fighters), the sub cannot be “ignored”. The attacker and defender do not have a choice, once the fighters are scrambled, the sub is in the sea zone and because an enemy destroyer is present it cannot submerge.
OK, so the Japs get 3 hits and the USA player elects to take the 3 fighters, leaving the sub. The USA sub hits (one chance in 6), so the Jap destroyer is sunk.
You would be on round 2 with 4 transports and whatever fighters, and the USA has a sub.
You would need to retreat all the transports (to the same sea zone), because it’s a no-win situation for the Japs now. All of the transports will be sunk by the sub if you don’t retreat (you have absolutely nothing to gain from continuing the attack).
So from what I read, you are concluding correctly. And yes, if you got additional hits with multiple subs, after hitting the destroyer your only eligible targets would be transports, and they would be sunk to the extent you scored hits with subs (of course the attacker would choose which transports). You have to lose a unit for every hit if possible, so sub hits would be assigned first to enemy warships, and any excess would start sinking transports (before the attacker has a chance to retreat, presumably).