Toyota Repair: 2008 Toyota Sienna Sludge, loaner vehicle, initial repair

Question
We brought our 2008 Toyota Sienna with 33,800 miles on it to the dealership where we brought it due to white smoke coming out of the exhaust.  We were asked for proof of oil changes, which we do not have, and therefore were told if they go into the engine, they would be able to tell if we had not done the oil changes and our warranty would be void.  We authorized the dealership to go in and do this.  They came back and said the engine was filled with sludge, therefore, our warranty was void and it would cost $4,100 to clean it out and replace valves and gaskets.  We refinanced our loan of only 2 1/2 years left to pay for this repair.  About a couple of weeks later, we were told he saved us about $300 dollars and we could pick up the van.  I went there and paid them the balance (they wanted $2,500 down to start repairs) and left with my van.  By the time I got home, about 30 minutes away, I had the smoke come out of the exhaust 5 times.  I called them crying and told them it was STILL doing the same thing.  They had me bring it back the next day and gave me a loaner vehicle.  

They then proceeded to call me about 5 days later to tell me the short block needed to be replaced and would cost an additional $6,577.  Toyota was giving $2,100 towards the repair as a courtesy and they would help with $700.  That would leave us to pay an additional $3,600.  

We had already refinanced our loan to pay for the initial repair that didn't even work, so we felt our only option was to trade in.  We no longer trusted this engine nor the service department to even do their job correctly even if we were to go through with the second repair.  Even then, after reading about this sludge situation, people have still had major problems after paying thousands of dollars for repairs.  

We are furious that this was not properly diagnosed and we were not given more information the first time around.  We could have just had a used engine put in for the initial amount and have been done with the situation.  We have spoken to many people, including 4 mechanics, who cannot believe that they would come back the second time and tell us we need to spend even more money when the first repair didn't even do anything to fix the problem.  

We were lucky enough to get a Dodge dealership to give us $10,000 for the van on trade, but now we are looking at paying another 7 1/2 years with a higher payment.  I have been so sick over this and feel the dealership should rightfully return the $3,800 we paid for the repair that didn't fix the problem.  Could we possibly have a case if we were to pursue this?

Answer
This is a legal issue which I can not answer but I think you have a pretty good case to get your money or most of it back because the problem was not diagnosed correctly resulting in a repair that was not successful,if they are not willing to refund all or some of the money then sue them in small claims court and make sure you have all documentation that you will need to make your case. Judges always seem to side with the consumer/customer, I think the burden of proof lies with them, good luck.