An awkward situation, most likely, but also an important reminder. However you treat those under you, you may be the recipient of the same treatment someday. If this systems engineer treated his direct report with courtesy and common consideration, he may expect (for the most part) to be treated with the same courtesy and consideration. If he leaned more toward tyranny, he should be worried.
This unexpected situation illustrates yet another reason for complying with the golden rule: treat others as you wish to be treated.
If you ever do find yourself in this position, a direct report promoted above you, remember to not be resentful. Your new boss did not leapfrog over you in order to make your life miserable -- it most likely had absolutely nothing to do with you. Rather, she took an opportunity that was good for her.
Best practice is to focus on your work and yourself. If you are happy and productive in your current job, that may be enough. If you want to be promoted someday, listen to and consider any constructive criticism that a trusted source may offer. And if you want to keep your eyes open for opportunities outside of your current company, that is perfectly valid, as well.
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