Might just want to send their lawyer (aka BIL) a copy of the LAWS regarding dogs running amuck and posing a danger to the community at large via certified mail. Obviously, he missed that part somewhere along the lines.
Also, send him a copy of your restrictions with their code violations highlighted and maybe pictures of the offending structure(s).
You guys can keep at this all day... and seriously, anyone can sue any body for any reason - reasonable or not - and, sadly, more times than not it'll be the stupid idiot who was in the wrong, but who brought the suit who'll end up the winner. But given the [alleged] damages of this incident for either side, it will more than likely have to be in small claims court. Not worth an attorney for either side at that rate.
BEFORE you get an official court notice tho', you need to be sure to dot all your "i's" and cross all your "t's" 'cuz it's all about
C(over)
Y(our)
A($$). That will include keeping a copy (for your records) of EVERYTHING involved with this mess and keeping it where you can be sure to find it if and/or when the time comes.
If it does come down to a court hearing? Be prepared to file a countersuit for the same charges and property damage as well as attorney fees (if you hire one) and court costs.