Thanks. So did you keep the car and if not what did you replace it with?
I had daily discussions with first the service manager and then the general manager of the dealership to come up with an acceptable outcome. When we came to an impasse over labor charges to replace the engine, I went to the sales manager and after 3 face-to-face sometimes contentious discussions with the service, sales and general managers we finally agreed they would buy the car as-is for $9,500 and I would use this as credit to lease a new X3.
I paid $0 for the repairs.
I had scheduled an independent mechanic to pick up the car at the dealership and determine the cause of the engine failure - and that helped push the the negotiations.
In the end I was quite satisfied with the new lease terms and I think they were happy to see this issue go away.