Did I understand correctly, that the previous owner (of the car) rebuilt the car but then outsourced the engine build ? ie the previous owner didn't do the engine build but rather just installed it once it had been rebuilt, then sold it on to you as a complete running car.
If this is the case then the beef is with the engine builder and not the previous owner isn't it?
Saying that if I had built the engine and it failed due to negilence on my part I would do what is nessicary to achieve the initial conditions of sale ie build a working motor with the parts, and in the condition originally expected.
If I was the previous owner(under the above situation) then I would be:
A) Helping pursue the engine builder as the work was really done for me and I sold it on.
B) Offering to install the engine or help install the engine once/if it is recieved from the engine builder.
If the engine builder cannot be made responsible then it gets tricky, really the previous owner has been taken for a ride as much as you, so perhaps the costs of the rebuild being shared is the best arrangement.
I guess you could argue that the previous owner has a responsibility to check the quality of the work they have done for them but in this case I guess this couldn't realisticly be much more than a lap around the block and a visual inspection.
All of this is assuming the situation is as I said above. It does get complicated
If I have got the situation wrong(ie I didn't get what was going on) I will gladly delete this post