Hi again Chet,
No need to apologise, no-ones claiming either way is the must do method, and I don't think there is a right or wrong answer to this one!
I understand your confusion over the button and blinds, but to avoid confusion I would refer to Dave's quote <the Button does NOT dictate the Blinds, it's the Big Blind that dictates the placement of the SB and Button>
Or my favourite, "The Big blind is the locomotive and the SB and Button are carriages following it round the track"
Now there is a problem with seat 2, is someone there? did they get the first hole cards? did they get the last hole cards in the deck? I don't know the answer to that and it is not part of the question we were asked so we need to infer a few details, however, and (this is what makes it relatively simple for me) because there has been more than two people acting on there starting hand, it will play out, I like Dave's explanation of why the hand plays out and agree with it in full.
Yes, it looks like seat 1 is getting the button twice in this circumstance, but so what, it's no different from the SB busting during a hand, which gives the button twice to the adjacent seat (unless a collapse occurs on another table) the Big Blind goes back one for the next hand and then jumps forward by two seats for the 3rd hand, and from there we have restored the normal orbit.
The overriding factor for me is two players act on their hand, and that's it, the hand has to play out in some way shape or form, unless theres a reason due to a fouled deck to misdeal the hand.
Best
Stu