You would think that for her own dog's safety she would have her pup on a lead. I have had similar situations occur in our neighborhood and I would say something like "Oh sweetie, you need to be on a leash!" to the dog. I'm a bit of a wimp, but try to let the owner know that a wondering dog (especially one who is not obedient) can be really dangerous. I'm trying to work on my assertiveness!
Louis is a cutie! He sure did the right thing in the situation!