I would definitely talk to your sister about it. Maybe BIL was just upset because he'd lost his dog...some men have a problem expressing grief. I don't see why Buddy couldn't just stay in the guest room with you since the other dog had the run of the house. I couldn't believe he expected you to tie Buddy outside...for one thing he could be stolen since they don't have a real backyard and the main thing is it's down right cruel.
Also,I know I would be upset if one of my relatives referred to Ziggy as an "It."