Am I being unreasonable? These two little boys will see a lot of each other - its not like they will be some sort of distant relatives and no one will remember what my nephew's middle name is. They are also going to be very close in age.

Would you use someone else's middle name as first name for your bubs? Someone really close to you?? When there is going to be only 4 months between the two babies???
Firstly, if the name Daniel is just a name she liked (without say a family connection or meaning) then I don't know whether I'd be giving her naming rights. It's sort of like my MIL - she had 3 boys - desperately wanted a little girl and wanted to name her Louise. The amount of suggesting for my daughter (first granddaughter) to be Louise was huge!

But at the end of the day it's my child, I have to LOVE the name I give them.

As for whether I'd use someone else's middle name - that sort of thing never bothered me. They will be individual boys, sharing a middle name wouldn't be that big a deal.