After they replaced the engine I would look for a lemon law lawyer. If they are not competent to diagnose the problem they surely are not competent to replace the engine. That car will never be the same.

If they didn't check out the dealership before taking the car for repairs they probably won't hire a competent lawyer either but good luck anyway.

Probably better check for an arbitration agreement in the paperwork. Maybe call the insurance company. I would call VW and give them my feelings about the dealer.