You really did do the right thing. I used to be a boss in a similar situation. I wanted so much to improve my company, but we had to protect my business partner's wife who was an employee. She had a toxic personality much of the time and it just wore me down. We could have taken that company far if we hadn't had to deal with the limitations of her being there.

Safeguard your own health and when you see that craziness going on around you, just try not to let it get to you too much.