londrum - 1:54 pm on Nov 22, 2010 (gmt 0)
sounds to me like they've done nothing wrong.
just to be sure... was all the SEO they did for you on this other domain? i presume they must have been doing a lot of link building and promotion on this other domain (which is want you wanted them to do). and switched it over in webmaster tools in preperation for moving it all over.
you then pulled the plug on your relationship, by which time the change over in webmaster tools had already been done, but not taken effect.
when your rankings tanked, you realised about what they did in webmaster tools and switched it back.
but now the new domain has overtaken you in the rankings again. well, that might just be because they did a lot of link building and promotion on it, and it's taken this long for it all to be reflected in the rankings. sounds to me like they put the work in, and now you are seeing the reward of what could have been.
if they want to sell the domain, and they own it, then that is their business. they were the ones that got it ranking well, and now they are making some money off it.
of course, if they are using YOUR content to do that, then that is a whole different ball game. and you should go after them for that. but if it's just the domain name and their own content, then i don't see how they have done anything wrong.