Don't let your father mediate this. If you want mediation, go with a trained family counselor or legal mediation. That's it.

Look your dad hopefully means well, but he could advise you to do something legally very stupid. He is not qualified to mediate this.

Start contacting lawyers now. If she does sue, you want a lawyer you can contact immediately.

Get a copy of the CPS report.

Take your daughter to the pediatrician for a clean bill of health and vaccination records.

Ask for school records.

Keep the above records and all her vital documents in a safety deposit box. Keep copies of those records on hand and readily accessible.

Save any texts from your BIL/sister.

And stay no contact. Anyone who uses the court system to take your child from you is a danger.

Listen: Stop for a moment and imagine your BIL not showing up with your daughter. What would you have felt if he had said "I don't think you're fit, so I'm keeping her safe, I'll make sure you never see her again"?

You were REALLY close to that happening.

Relatives have kidnapped children and disappeared, going missing for years. She's irrational enough to set CPS on you, she could be irrational enough to decide SHE is the only one qualified to raise your daughter and just disappear with her.

Is that a risk you're willing to take?

Your sister is a ticking time bomb and you just had a VERY near miss.

If a rattle snake strikes you and misses by a hair, you don't cozy up to the snake after.

Ask your father for help documenting her past history. If he isn't willing to make a formal statement that your sister is dangerous then he is not on the side of your daughter's safety.