This is a bad deal, and an assembly mistake has probably cost this guy everything short of the block, heads, exterior covers and tin. The sad fact is, any part that had oil flowing through it MUST be removed, disassembled, inspected and rebuilt or replaced. Copper in the filter is the key to calling it a loss and pulling the engine.
I would suggest talking to a lawyer. Also, remove the engine as complete as possible and take it to a reputable builder for a documented tear down. You need photos from its complete state to a bare block, showing step by step detail of every part, failed of not. You also need a written affidavit from the person who disassembles the engine giving detailed information on the severity of the damage, and if possible, identification of the root cause. Document everything, and save this thread, along with any other discussions on the matter. Keep track of names and dates like it's your job. Proper documentation is the difference between a successful challenge in a courtroom and a failed one. More likely than not, the builder here does not have detailed build documents, in which case your autopsy, performed by a professional, will put you in a strong position to resolve this.