I would want to know what codes were stored that led them to start tearing it apart and then declare it is so sludged up it needs a new long-block.
You say there is no noticeable drivability issue so it seems a stretch they claim the engine is so far gone it needs to be replaced (on your dime).
Where do you get the odd mileage number of 3700 mi oil change?
Did you exceed the MANUFACTURER recommended mileage for oil changes? I make the distinction because dealerships often recommend more frequent changes than specified in the manual.