Thank for posting your issue.
Since this issues pops up again i think changing the thumbnail HTML code within a DOMDocument is not a good idea at all.
I will consider this code in the next version.
For now as i understand WordPress defines the encoding twice.
The encoding for the database in wp-config.php with define('DB_CHARSET', 'utf8');
And secondly the HTML encoding, as i understand you can change this value since version 3.5 (http://codex.wordpress.org/Function_Reference/bloginfo) and is UTF-8 always.
So i expected your DB_CHARSET is not utf-8 (or the data in your database is not encoded utf-8).
echo $doc->saveXML($image); break; on line 609 prints the wrong encoding.
Are you enable to test changing this line into the following code:
echo iconv('UTF-8',DB_CHARSET,$doc->saveXML($image)); break;