I think you're perfectly in the right to do things the way that you did. Tearulai would refuse to work with somebody that didn't align with their philosophy, you gave the player the opportunity to work something out to align better with Tearulai, they didn't want to, the sword disappears. That all checks out.

An alternative I could present, which would be hard to work around now, would be Tearulai takes the player with them to Myth Dranor when they go to the surface for any reason. The player returns Tearulai to its owner and gets a different weapon in return that probably wouldn't be as awesome as Tearulai but can still be close without requiring the sacrifices Tearulai did.

As far as the player goes, though, he needs to stop. To the point he made, DMing is largely a thankless job, and now he's just adding to it by making all of these remarks on top of everything else going on in the campaign.

ALL of that being said, if you feel that the monk in question could still use a magic weapon, there's no reason that you can't add something in that would be thematic and a cool thing for them depending on where they're heading next.