It was probably scrapped simply because it needed repairs so serious that they weren't justified in light of the future needs of the K37's. This is at the time when the Marshall Pass line has just been ripped up, and the Monarch branch is going to be standard-gauged.These two lines represented most of the mileage for the K37's, and as there were enough K36's around to serve the Alamosa-Durango-Farmington lines, why bother fixing up something not really needed.
Fortunately, they didn't scrap the whole bunch (of the K37's) or they would have been in a real mess when the pipe trains started running shortly after this time period.