318 Full of Chunks of Rust, How Bad is That?

In post #1, picture #1, the back of the block and the center of the crank are painted. This is not normal. Was the engine "rebuilt"?
Remove all freeze plugs even the ones in the heads and flush from top down. I even stand them on end and flush. Be sure to seal the spark plugs holes and exhaust ports. After flush, get after it with an air hose.
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Better yet get your money back.