allright; I'm going to give names in thsi situation, so that I don't get confused.

first hand. Paul is the dealer. Greg is the small blind. Bob is the big blind. Andy is the first player to act after the big blind.
Greg gets knocked out this hand.

Dealer button moves to Bob, since Greg is now gone. Andy pays the big blind. There is no small blind on this hand.

That's how party does it and that's how royal vegas poker does it...so I'm inclined to believe that's how it works.