Like with anything, there might be some outfits you borrow. We don't dress up much and I don't want to buy a dress if the kidlet is going to outgrow it in four months, so borrowing a dress and returning it, is better. But to give away a bunch of baby clothes and expect them back seems wrong. At least mention it up front and give the recipient the option of keeping track of them, and certainly expect certain things might get ruined. I, personally, wouldn't want to try to keep track of them or worry about them getting ruined, so I would decline the offer. Plus, I might want to hang on to the items in the event there is another baby, so may as well just purchase clothing that I can keep.
I hung on to all my baby clothes in the event we might have another. When that door closed, I shipped them off to charity. If I knew anyone with a baby on the way, I probably would have given them to that person.
I've given bags and bags of clothes to my sister. She picks what she wants and donates the rest. Where or to whom, I don't know. They are hers to do with as she pleases. Admittedly, I would probably be upset if I found she was selling the donated items. She received them for free, and I think it is a pay it forward type of thing. But I don't really have a say once I have given them to her. I can just donate them to charity instead of giving them to her, or sell these items myself.
Baby furniture or stroller, I have given "on loan." Again, not sure if another baby would come along at some point, I did want these items back. This was made known up front. If I no longer had use for the furniture, they are free to keep the items or dispose of them as they see fit.
I do agree, with you that it seems D should have donated the items, but I also agree, once you give the items away, you really don't have a say on what they do with them.