Best of luck in whatever you decide to do, Todd.
$6100 is a bunch of moola to just walk away from. Since he admitted he would give you your money back if he had it, and since the engine was billed as "all new parts except for the block", I feel it is worth pursuing. Of course I am certainly no attorney. Maybe he would work out a payment plan for you or agree to pay the Keith Craft bill (don't panic Drew, I am not recommending you carry a note
)
Without knowing more of the facts, I would agree with Ernie about the concerns of deeper financial troubles for Lone Star. I hope that is comes to a good conclusion for both parties (if possible).
Keep us posted on the final outcome.