I like the way you handled it. According to Robert's rules, you have a choice:
http://www.chiptalk.net/roberts_rules_of_poker.php
I never really comletely understood the "moving button" method, so I don't know how that would apply in this situation. But your solution seems to be a good application of the "dead button" rule.
I like to advance the BB. If the BB busts out, then the SB ends up on an empty seat (so nobody has to post the SB twice in a row). But in this case, the person to the left of the BB busted out, so just moving the BB and SB ahead to the next available players seems to work out fairly.
