Okay I read your entire post and then went back and read it again...
When you said "Last night FIL called DH and said that he just bought a 2012 Ford Edge and that he could probably use some of the money that we still owed for the tahoe to get his tags and registration for the new car."
Have you paid him the full $10,000 or are you making payments to him until you reach $10,000? If you are making payments, have you been making them regularly or are you in arrears?
I guess that would determine which way my answer goes...
ETA: Thanks for the additional information. WOW...you're not going to come out of this one with the already strained relationship in tact. If he honestly believes that you are indebted to him for an additional $10,000 he is out of his mind. It doesn't sound like you will convince him otherwise because he will always feel you owe him that additional $10,000. If you want to totally get out from underneath 'this' why not offer to sell it back to him for the $10,000 less the depreciation so hypothetically say $8,000 and you go buy yourself a vehicle from NOONE you know...