Then the analogy is that your running a shop selling stuff, and then when people come in asking for product x you tell them you won't give them product x because the owners of product x don't pay their bills to you.
It all depends on who owns the hosting. You can't sued for libel if you tell the truth.
If you provide two services (say, design and hosting) you can't hold one "hostage" for non-payment on the other (that's my understanding at least).
Take it to small claims court, or let it go.
Designer seems to have recovered his goods domain/hosting and used it for what he wanted. To slag off the debtor.
BTW, I don't know why everyone assumes the facts are as described on the defaced website. It's not like we've heard the other side of the story. (Personally, I'm unlikely to spend any time to study it in detail, anyway). But if I knew who the web designer was, I'd certainly stay the hell away from him. This was ridiculously unprofessional and inappropriate.
If you failed to pay a contractor building you a house, they can take a lein against the house or sue you, but it would be quite illegal for them to start tearing the house down. Similarly, unless you have a written contract saying that their website is merely a service you provide, defacing their property is not putting you in a stronger position, morally or legally.