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Did we handle this correctly?
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Depends on what the "House Rules" are. There are two totally diiferent rules for this particular instance, but it appears that neither of these were followed.
The "Dead Button" rule (used in most House Games) basically states that the Big Blind always moves to the next player due for the Big Blind and the SB and Button adjust accordingly, even if it results in the SB being located at an empty seat and the the same person being the button (i.e. dealer) two hands in a row.
This is the most common rule, but the house could also use the:
"Moving Button Rule", used by most on-line poker sites and basically states that the button moves to the next player due for it and the blinds adjust accordingly.
If a house game enforces the "Dead Button Rule", often someone will object because "it's not the way Party Poker does it", but it depends on the House Rules. I don't believe there should ever be an instance where the button is located at an empty seat.
Here's a link for either one:
http://www.homepokertourney.com/button.htm