I'm all for spaying and all. my kitten has apt next tuesday. but I'd be D#$$# is someone told me I couldnt' have MY!!!!!! animal, they would be making a medical decision and I would have to pay them back. I'm sorry but that is straight BS!!!!! Period! You're not the animal queen of the world, you have no right to make a decision or judgement regarding this dogs health or the owners care for said dog.
When irresponsible owners lose their pets and can't manage to even bother looking for them for over a week it is common practice for shelters and rescues (and the OP runs a rescue she isn't just a person off the street) to require that owners seeking the return of said pet to spay/neuter them so that should pet find themselves in such a predicament again at least they won't be adding to the pet over population problem. Our local AC has the same requirements before you can spring an unaltered animal from their shelter (you can spring them for $15 but you have to sign a contract to have your pet altered within 60days with the exception of pets under a certain age). The OP is the legal owner of this dog, she is being more than generous by giving the animal back at all. This dog is not a specimen that should be bred. In her place I think I would be hard pressed to make the same decision with such an irresponsible owner.