Yes, the Seljuks collapse if their capital is taken or they're reduced to two or less cities (it's similar to Byzantium while it was a minor civ).
Don't know what's up with their stack, were they attacked by someone in the meantime? Thing is, if they already control the whole Middle East and have no threats to respond to, they still won't attack cities outside of it (I told them so to avoid giant Seljuk empires in the wrong parts of the world).
And the setting reset is an old problem of the civ switch mechanic, but now that you say it I'll give it a quick look to see if it's fixable.