Thank you. It's actually not a recessed wall, it's just a bay window. Does that change your thoughts? Is there enough room for this layout?

I would still only do it in the bay window area, if you create a full banquet seating it really limits the uses for the space.

ok, so you mean just one side and not wrap around. Great. Do you think that layout is better with the tv in the corner to the left of the fireplace and a small sectional, versus the original with the tv placed to the right of the fireplace on the wall?

Yes just one straight run of built in seating inside of the bay window.

Yes I feel like the second layout has a better use of space.

For the family room, I prefer #1, with the tv on the wall to the right of the fireplace. You may want to add a game table if your family plays games. It would also double as a casual meal table for four. Eating at a linear table (bar) doesn't promote conversation, so I hope you use the dining room when the whole family is home.