This is why we can't have nice things.
Some volunteer puts in time maintaining something and makes a claim that is obviously correct and - most likely in jest - promises cash to anyone who shows it to be wrong. Then some rules lawyer decides that he's better than the unpaid volunteer and does his best to humiliate him, just for the lulz.
Is it any surprise that volunteers rarely stick around for long?
Nowadays lots of companies run bug bounty programs where if you find a bug and report it responsibly you can get real cash. This is a valuable service. And I'm positive that these programs get gobs of submissions from people trying to see if they can find a bug in the rules, rather than in the software. If the people vetting the submissions to such programs weren't getting paid for it, I'm sure they would quit in disgust.
The "unpaid" volunteer in question was raking in $100 per attempt for an arguably impossible task. That unquestionably moves the situation from a bounty/prize to a gambling house taking rigged bets and it's pretty clear by his language in the emails that he took pleasure in his position. How many fools did he part from their money before getting one upped by Patrick? And how did he act when he finally realized he wasn't as clever as he thought?
I'd agree that if this was a free entry situation he'd be fully within his rights turning down trolls, rules lawyers, etc. for the same reasons you mentioned. Trying to scam a well intentioned but naive bounty post would be sad behavior. But this guy was clearly taking money on a position he never intended to pay out on and not losing any sleep over it.
That's not what it was at all.
Any time you say that something can't be done, you will attract people who say "I have found a way to do it!" Even more so if you have a proof that it can't be done. This phenomenon is far older than the internet; the term "morbus cyclometricus" suggests its origins in antiquity.
The FAQ maintainer was not looking to profit off fools. They wanted to chase them off; after spending several pages explaining why the task is impossible it is tedious to explain to a crank (the term generally used for such people, as described by Underwood Dudley) that they are in fact wrong, the task is impossible, and here's why. It's easier to say "Pay me if you want to waste me time" and reasonably assume that no one will do it.
It's similar in spirit to the James Randi challenge. You're not going to win it, because you're not going to prove that math or science is wrong. But the JREF had as its goal to expose the charlatans, and had the time and resources to devote to the task. A newsgroup FAQ maintainer has neither the time nor the resources. So they shouldn't have volunteered? Then you have no volunteers. Hooray for the internet.
Now yes, every once in a great while someone will come along and legitimately do something that was claimed un-doable; the obvious case is George Dantzig. But that case also shows that any scientist or mathematician who can be shown an error in something thought impossible will be thrilled at the discovery, because that is new knowledge, which is the whole point. Poking a hole in the rules of the contest, finding a weasel way around them, is not something interesting at all.
Sorry, I don't buy that argument. You could just ignore such people instead of take advantage of their foolishness for monetary gain. Nothing says you have to engage with each and every person showing up with preposterous claims on the internet. If he was the actual FAQ maintainer, using his position to advertise an impossible prop bet that really would only sucker in "cranks" isn't moral behavior. Failing to pay out by weaseling your way out of it with pedantic arguments about intent is even less so.
As far as I'm aware of the James Randi challenge doesn't require a participant to pay anything- it's genuinely a challenge and not a bet. It's not taking advantage of idiots to part them from their money and gloat about it over them after.