Yeah, C to YC = upgrade in the world of Hertz, even if it isn't always one to us. GDON's class list (incomplete, but the Cs and YCs are on here) shows Jetta as a YC. http://flyertalk.com/forum/showthread.php?t=743032

Pretty bad form to make a big deal of it when the car is damaged, but it is possible the agent did not know that (unlikely, maybe, if it's a small HLE, but possible). It's also possible they were unaware of the extent of the mechanical issues, but even with the cosmetic ones, I would say it's lame of them to send you out with that car if they had another car available, even if that would mean a big upgrade.

Fuel is an annoying but minor issue.

At least you were able to swap out the car eventually, even though that took extra time. I think I would have pushed harder for another car originally, though. Sounds like you were a little to anxious to hit the road.