I'm going to tell my wife that her dad isn't that bad
Why do you need to bring up her dad again?
Because my wife is too judgemental and she's spoiling the atmosphere.
It is good to tell others that they are too judgmental and ruining the atmosphere. Thus it is good to come to the deference of you father-in-law when you think he is being harshly judged.
No it's not. She can't appreciate his good traits.
Defending the rumors is okay, but you should not let them come between you and your wife. It is going to become a huge issue between you too.