[mimodok]

It sounds like your puppy was challenging your authority as alpha! Male Yorkies can often become aggressive and territorial unless they are constantly reminded of their subordinate rank in your household. You did good to put him in his place by saying no and yelling.

But, a dog's crate should always be a safe and wonderful place--never a place for timeout. Putting dogs in timeout in their crate is a common mistake that people make so don't feel too bad. Reinforce that your puppy's crate is good by giving him treats in there, feeding him in there, encouraging him to sleep in there, and playing with/petting him while he's in the crate.

Here is how I would have responded to the situation you described.

After the dog lunges.
"NO!"
Then I would forcefully take the underwear from his mouth, but not snatch it too rough.
(loudly) "That is MY underwear! I am alpha! Don't you ever snap at me!"

The dog should look shocked and submissive, maybe backing away from you. If the dog continues to show aggressive behavior, do what I call the "alpha knock down." This move is tricky and should be used as a last resort. If not done correctly it can give your dog the wrong message--that they should fear you and they should defend themselves from you. Be sure that before attempting it that you are very attuned to dog body language, especially recognizing submissive behavior.

Now you have taken away the item your dog was being territorial about. If you leave him with no item, he will learn that he does have to defend his things or they will be taken away. Do a trade. Give him a toy that you approve of him playing with, and then leave him with it. By ignoring him for awhile, you show that you are still unhappy with him and he will have to earn back his place (close to you, the alpha) in the pack by showing you respect.

If he comes and lays at your feet, starts following you around the house, or shows other "subordinate" behavior--praise him and give him treats. Tell him you love him and that this is the kind of behavior you want, then continue to go about your business with the dog at your feet or whatever he was doing.