That worried me, about your daughter having to fend the dog off with a shovel. She could have been SERIOUSLY hurt. Now if this was say, a beagle or something, you might have been able to handle it differently, but being a German Shepherd, your husband did the right thing not taking any chances and shooting the dog. Yes--Chickens are replaceable (which, btw, you most certainly should insist on recompense for your losses), dogs are replaceable, but your daughter, or even your husband, is NOT.
Aside from your safety, state and local laws often allow for shooting a dog that is harrassing--much less killing--your livestock. Anyone who keeps livestock should be aware of their rights long before something like this ever happens.
As sad as it may be that your neighbors have lost their beloved pet, this is their fault entirely. Even if the dog slipped out accidentally only once in it's whole life, STILL their fault. Too many people don't take responsibility for their animals or their actions. What if the dog had bitten someone? They'd have a lot worse on their hands (and more of a monetary loss than just replacing the cost of 17 chickens).
I am soooo sorry that you had to deal with this...very traumatic and tragic!!