2002 BMW Blown Engine 5,000 mir I bought it. dealer willing to take it as a trade in... what should I expect??

This question is a bit long in order to explain it but I would love some help from anyone who might know something... In late July I bought a 2002 BMW 325xi Wagon from a dealership. I got a small loan for about $4,800 and paid $9000 cash for the car. It was in good condition and the carfax looked clean. Then a little over 2 months later I took it on a road trip to Iowa, which is about a 7.5 hour drive. we made it there just fine, then on the way home the car began smoking like crazy from the engine and there had been NO indication of overheating... the gauge had been fine until that point. In fact, the only indication was all the smoke. It was only until we turned the car off then turn the key to "on" position, not the "start" position that we saw the gauge finally showing it was HOT!!  We figured, okay no big deal we'll get some water in it and head to the next gas station and get some coolant. But when it was finally cool enough to open the coolant compartment to put water in, it wasn't even empty! Low, but not empty. The engine was refusing to cool down, even with the water in there and having sat for at least 30 min... which for an overheating car is ample amount of time to cool. We decided to try to start it to get the heat running and then all of a sudden it wouldn't start and the check engine light turned on. Long trip and story short I brought it to a BMW dealer (not where I bought it, bought it from a VW dealer that would have been much more expensive to tow it to). The BMW mechanic calls me and tells me it got so hot that it blew the gasket and melted parts of the engine so badly that it needed a new engine! $10,000 for a new engine, might as well have totaled the damn thing and now I wish I had. It'd be easier to clean this mess up! Of course I'm not wishing to have been in an accident where someone could have been hurt but you get my point. Anyway, so I have no warranty on the vehicle but myself and my parents have been in contact with the sales manager from the place where I bought it and it sounds like he's willing to work something out. He has offered to "trade" it in... I'm wondering if someone can give me an idea of how much $ would be an acceptable offer??? My dad has said the price I bought it for minus the depreciation of the 5000 miles I drove it. My mom says blue book value ($7989) which is WAY low considering how much I paid. I got screwed, no one needs to tell me that. Anyway, has anyone ever experienced anything like this? Do you have any idea what a good price would be? I mean it seems reasonable that I should get a car only a couple thousand less than what I bought that car for.... otherwise he's trading it at a value that is indicative of the car with a blown engine, but the BMW mechanic said it was a malfunction of the engine, which means the blown engine is not my fault so should I really have to take a hit on that? Anyway... ugh. Anyway I'm meeting with the sales manager to talk in a few days but I'm getting really anxious about the whole situation. Any dealers out there might know how this works??? Thanks!!