The pilot obviously had issues, major issues I'd say. This is an ORM down if I've ever seen one. Military pilots need to compartmentalize because we need to assume great risk to accomplish our missions (if you’re saving lives or taking lives that is). Unless the flight was critical, I doubt I’d allow a pilot like that to fly with me.
They made the right call. It is understandable that the police were involved. Commercial aviation should assume as little risk as possible. Though no FAR's were broken (that I know of), he still should have been removed. While it may cost them a few bucks to cancel a flight, or in this case remove an emotionally unstable pilot, it's far better than risking what could happen.
If this article is accurate, the pilot was out of line.