Repossession: Why Should I Pay the Balance

My question involves an auto loan or repossession in the State of: Texas
We purchased a black 2007 Toyota Yaris for our daughter and we had the vehicle for about 3 hours when she was hit head on and totaled the car. We purchased another Yaris (silver) to replace it. She was working and making the payments on the car. We had the silver Yaris for 4 months and she found out she was pregnant with twins and due to complications was not able to continue working. We contacted the finance department and made arrangements to have someone take the car and make the payments. I spoke with a representative and set this up that a friend would make the payment to us and we would make the payment to Wachovia.
Just prior to him taking possession of the car, Toyota called and told us the tags were in to come by and they would put them on. They put the tags for the black Yaris on the silver Yaris. The finance company sent someone out to verify the residence where the car would now be (We gave them the address). When the guy came by to verify residence the car had the wrong tags and he said by law he had to repossess the car. We called and tried to explain the mix up with the tags (after much calling and discussion with Toyota) but were told, by Wachovia, that we would have to pay the balance in full to get the car back. Needless to say we had no resource for that.
They sold the car and are now attempting to get the balance remaining. I am very up set that we had a perfectly good solution and because of a mistake outside our control we are being harassed and hounded for the balance of this loan. Could we sue Toyota for the mix up or possible get the debt completely cleared?