Unfortunately when buying second hand goods you are always leaving yourself open to these situations.

In my opinion running the engine straight away would have made little difference. I don't know much about US law but am pretty sure that in the UK the usual commercial trade laws do not apply to private second hand sales. There is no outright legal right for a refund or exchange on second hand private purchases. The engine should have been run BEFORE purchase by the buyer (or even have it independantly checked) to confirm its condition. I know that this is not always possible and in that case you have to balance the risk with the cost saving.

The only law that I am aware of in the UK is that the seller is not allowed to blatantly lie about the condition of a product. However that relies on him knowing. Can you guarantee that the seller knew that the engine was faulty? Do you know for sure that the engine was faulty the last time it ran?

I know its harsh but I don't think that the seller has any responsibility here at all.

p.s. I have been in a similar situation with a second hand engine that failed before it ran. I mentioned it to the seller but he was not interested. Unfortunately I knew that he was not liable and had to bite the bullet and get the engine repaired myself.