Besides, it's a little hard to argue that with Bioware and Epic making games for MS using that engine.
Yet one is an Action RPG and the other is a Tactical FPS. Too Human is an action-fighting game which will rely heavily on stable framerates and advanced animation. UE have never been known for great animation; part of that problem is obviously artistic, but there is no indication that UE3 is designed to accomodate a game like Too Human, God of War, Heavenly Sword, etc.
Who knows if the rumor is true. A number of developers seem to be getting along with UE3 fine. Of course there are no finished products yet and there is no denying that middleware is not the best solution necessarily for console exclusive titles with good funding (but is a good way to get out of the door quickly... doh!) If this rumor is true (big if), then hopefully their new engine is well adapted to use all the content they already created.
The last time TH it had serious camera issue, framerate issues and stability, dumb AI (disabled?), lack of interactivity in regards to robots, a lot of precanned/long/unbreakable animations, and a seemingly lack of combos (although watching HS in the hands of a newb and the HS dev team was an eye opener, so that may be a player issue, not game issue), etc. The best thing about TO so far has been the art direction and the still shots. Whatever they do they have a long road ahead of them.
But SK has made some great games in the past and with MS funding I hope/expect they can really clean it up. The God of War dev said 12 months out (right before they delayed the game) it was a mess and the extra time allowed a ton of polish. So we can hope
Edit: It would not surprise me if SK had their own engine already in development in the background. I am sure a LOT of companies using UE3 are doing this. Get early games out the door with UE3 and then go with a more specialized version for each platform down the road.
