If I were to buy any motor that someone else had put together, I would immediately take it apart upon reciept just to make sure things were ok. There were odd/snapped studs in there. This would have been the first reason I would have pulled it aprt to check everything. Also, the fact that it was a new/rebuilt engine would also lead me to at least pull the head and check the pistons walls.
In one of the e-mails you sent to Wydopen, you state that you know engines well, so I thought you may have done a really good inspection on the engine before running it. With that said, I would be a little disappointed if I was in your shoes.
I would think the best thing to do here, for the sake of riders helping out other riders would be for both of you to cop half of the cost each.
When it's all said and done, and the weapons have been put down, we're all here for the same thing, so lets help each other out so we can all get along and keep riding.