Before I did anything with this poor dog, I would:
- Have a thyroid test done - costs between $80-180 probably depending on where you are at.
- I would look for a veterinary teaching school that had a vet behaviorist or try the Tufft's VetFax/PetFax program through their behavioral school and Dr. Dodman: About Tufts Animal Behavior Clinic : Cummings School of Veterinary Medicine
- If the complete thyroid test proved to be normal in all senses of the word, their recommendation agreed with others' you have gotten, I would ask the breeder what her plans were if he were to return there.
Sometimes dogs are bad fits for different people and situations - and show themselves to do extremely well in different environments that provide whatever it is they need (if there is a need that can be met - cannot always be the case). While this could be the case with your dog, he now has that dreaded bite, that should not/can not be passed along. What were the circumstances of that bite?
As for the breeder, the money, the replacement puppy, I would totally walk away. The relationship with the breeder is stressed, there is no guarantee really with a living thing (and a lawyers fee would put you up how much?), and I would worry that some concerns would be passed down the leash to a puppy from that same breeder.
We don't know you, your experience with the breed, or the dog, but thanks for trying to help him. He at least has an advocate and that is helpful.