If the upholstery fabric is cotton, it will wash but as you've discovered shrink considerably. Any cotton fabric will fray so unless the fraying is excessive, I wouldn't worry too much about that. As to piecing the background, you'd have to try it. I'd think that it would be doable but upholstery fabric is somewhat heavier than regular quilting weight cotton and you might have problems with the seams being awfully bulky. I've never done it so I really don't know. My guess would be that you would be better off to applique the animal onto the upholstery fabric rather than trying to piece it, but, again I've never done it so don't know that for a fact.