This is wrong on a number of levels. I don't know Doc, but from all I've read, he knows what he's doing when it comes to tuning a bike. So that is the first pile of poop. The use of Redline Oil is another pile. And changing the exhaust is something the dealers ENCOURAGE you to do before it leaves the shop, and I don't know the actual numbers, but I'd bet that at least 70% of all HD bikes have non-stock exhaust of one sort or another. Finally, HD cannot "cancel" your extended warranty, as they do not provide the coverage for the INSURANCE policy that it is. That is a third party...look at your ESP documents...give them a call, just to find out if HD actually cancelled it. They do not have the authority to do so. It's the same as if you had a wreck and HD called your insurance company and cancelled the policy for you or for the provider. I would not give them any details other than asking if it's been cancelled, and if it has, I'd get it in writing from them who did so.
Most HD dealers I've been to sell Vance and Hines exhaust systems and Race Tuners. They do NOT tell the buyer that the items they are selling to you void your warranty, or the extended warranty. Because you did not purchase parts that HD sells through their dealership, but function exactly the same way (the same people that used to make Race Tuners make the TTS), does not make those parts more potentially damaging.
It's not my decision, but I'd find me a good consumer attorney. I would also contact Redline, Fullsac, and Doc, just to put them on notice that HD is claiming their product caused a catastrophic engine failure. Then I'd get the reasons for denial (or let the attorney do so) in writing from the MOCO.
I would not trust this engine rebuilt unless they split the cases and did so from the ground up. Or replaced the entire engine. Either way, it's going to be...or would be for me...big bucks. Enough $$$ that at least talking to an attorney would be worth the effort. It may only take a letter from the right person.