I know you said you chatted with your friend from the USDA, but I can't help but think that there has just GOT to be a Humane Society locally.
Can you check online maybe about local animal ordinances. A lot of residential areas limit the number of dogs allowed. Or, there may be some other local ordinances she could be breaking. Running a business in a residential area? (selling puppies out of her home?) I don't know..
The other thing you mentioned, about exchanging dogs for money due is also an option. Personally, I'd approach the man tho. It sounds like he couldn't really care less what about the dogs and sees them as a liability where she sees a potential asset in them. He probably wouldn't mind picking up the first one under his feet and bringing that to you instead of a load of wood. A whole LOT easier on the back.
Hmmm.... maybe talking to a local nokill shelter! I'd bet they would be helpful in some suggestions if not help you get those babies!
As far as wanting those "nasty" dogs, No, I don't think I'd want them either. But like you said, clean them up with a nice warm bath, brush them out or whatever. Find that sweet baby underneath. I'd keep my babies away from them until you can get them quarantined to an area they aren't in and/or checked out by the vet. Then, I'm sure you would be able to find folks that would LOVE to have a sweet, clean baby to rescue. Or..there again, a local nokill shelter maybe. Who knows, you might find one that just melts your heart to add to your family.
It's too bad you weren't on the other side of that fence when she dumped her "dead" dog over it. That would be ONE saved and rescued!
It sounds like an absolutely DEPLORABLE place to have to be. So sad!
Wish I knew something that would truly be a plan to help. Good luck