With the amount of debris I see in the filter - the engine is hurt, and not going to "fix" itself and needs to come out for repair.

The damage could have started at the intermediate shaft bushing, from debris in the oiling system, a nicked crank, etc. and carried through the system. And realistically, if the old motor failed from spun bearings, there could have been that much debris left in the oiling passages if they didn't properly hot tank and prep the block. Might be hard to pinpoint the root cause at this point.

I understand being on a budget, and this isn't intended to be insulting, but I keep reading about the engine being "rebuilt" for $1400 - I'm curious about what "rebuilt" means at that shop.

Reason I say that is in this area - Southern Mi - you wouldn't get an engine torn down, rebuilt, and assembled (even wrong LOL) for anywhere near $1400. For $1400 you wouldn't get any real MACHINE work done - you might get a basic hot tank, ball hone, and the rings, bearings, timing chain, oil pump and gaskets replaced job, along with the valves and seats ground, etc. But that is far from being "rebuilt". It surely WOULDN'T INCLUDE - boring cylinders, new pistons, align honing, reconditioning rods, grinding crank, deck/head milling, valve guide work, thread cleaning/repair, crack detection, etc. - the things that are usually expected to be done if an engine is getting a quality rebuild.

I hope you can get the "vendor" to step up and make their work right, because you should be able to get a sealed up and functioning engine back for $1400, assuming no hard parts were broken in the core engine, and no real "machine" work was needed.