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The owner can sue you for the difference. But that doesn't mean he will succeed.
If the owner mis-represented the state of the car to you and these mis-representations were material, and clearly they were, then you could have sued the owner had you been stuck with the car.
So you can tell the owner you are happy to have a court decide but you are letting him know that you will be seeking damages from him at the same time as you had to spend considerable time dealing with the auction house and are not without a car that you need.
It is unfortunate that you did not take pictures. You coworker and you can both testify. I can only suggest what you can do. I cannot solve your problem.
You are where you are and you will have to do the best you can. You could subpoena the new owner. Ask what state the car was in when he got it etc.