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Unless I missed it, someone please copy and paste me "the answer" from the horses mouth.
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I believe the answer is coming from a different area of the horse.
Since this dealership has proven themselves to be sketchy, it is time to introduce them to the power of social media. You need to get on to Bing, Yahoo, Foursquare, City Search, Google+, Yahoo, Yelp, and facebook, and write 1-star reviews (with a note about 0-stars) for the terrible service that you received; as well as the bogus warranty denial. This dealer will lose more in future business from bad reviews, and damage control than a mere engine replacement would have cost them.
You wouldn't believe the amount of time, personnel and money that my company spends to mitigate just one bad review from a customer that feels cheated. The fact that we have departments in the company actively lying to customers doesn't help.