Shadowhunter, my understanding is that having a colossal dragon even facing a level 1 character at all is bad DMing; there's a thread from a while back in which BG Zeke essentially told me that very thing. Having the character die as a result of my choice to put him in that scenario, therefore, would be compounding bad DMing on my part.
I slightly disagree, but I need to make a few clarifications.
Putting a level 1 party in the presence of a colossal dragon is not the sign of a bad DM in and of itself.
Putting an aggressive colossal dragon with little patience with a level 1 party which have a history of snapping out against anything, even if it would be a very bad thing, that's a sign of a bad DM.
Putting a neutral colossal dragon with a level 1 party when the party, partially or fully, is known to always charge potential or even imaginary threats is bad DM'ing.
Putting a colossal dragon with a level 1 party where the party gains the beginning of their epic quest by talking to it and then they leave, that's good DM'ing.
You can't be blamed for your players actions, unless you were the one that put them in a situation where the only actions they could take would be bad ones.
OR, if you knew that the most probable action they would take would be a bad one, then it's also your responsibility to make him/her realize that there are alternatives.
If the party knows they're hunting an illusionist, then blindly rushing through a room and falling down a deep hole that was disguised with an illusion then I wouldn't say the DM is bad, but the player is stupid.
If the same thing happened, but the party didn't know they were hunting an illusionist, then it's unfair.
UNLESS you gave them plenty of opportunities to do their research before starting the hunt and made the opportunities BLATANTLY OBVIOUS and they ignored it or missed it every time.
So, my point was about definitions. Some people use the word "punishment" differently and the associations to the word results in people reacting differently.
My whole take on the original scenario is this:
Your encounter, in a vacuum, isn't overpowered from a general point of view. 6 6th level characters vs. 1 7th.
Your party should have had prepared for situations like these, if they are experienced adventurers (and their players are experienced players), but they didn't.
If they are experienced, it's their fault for forgetting it. If they're not it's yours.
The bigger problem here, is that you didn't modify your encounter to the party's power. While some people can take this with a "oh god, serves me right. *groan* How could I have forgotten to get something like FoM at this level?", some can't.
It's like tossing a CR 6 flying creature against a 7th level party without ranged options. They should be able to handle it if they had prepared, but they didn't. It's fine to do this once or twice, but the thing then is to allow the party to escape, learn its lesson and return more prepared. Facing massive Battlefield Control isn't helping the "escape" part.
Your party isn't particularly powerful and you need to take that into account when designing encounters.
So, yes. Your party was doomed from the start, since the only time we as DMs can throw anything like this against our players is when we know that they can handle it. To make a TPK with the reasoning "You didn't invest in anything like FoM, so you happened to die, that's it" only works for some people.
Some people like that you take it easy on them when they're beginners. They learn better that way and build up confidence.
Some people dislike that you take it easy on them and insist that you pull no punches, so that they learn better and quicker.
It's the same principle here, you need to figure out what kind of players you have.
Example of everything above.
I ran a game which consisted of a drow wizard, a pixie warlock and tiefling monk/psychic warrior against a War Troll.
I made the following misstakes:
I believed that the monk had a higher AB than he had. The only way he could hit the troll was to roll 19 or 20.
With the SR the Troll had, the warlock couldn't
even hurt it.
The redeeming factor:
Early in the encounter, I flat out asked the wizard player if he wanted to activate his Greater Mirror Image in response to the Trolls first arrow.
He declined with the reasoning that he could wait a turn... he wanted to save his slots. So the 18 damage he took then was his fault, not mine.
The other shot, which dropped him unconscious, was just plain bad luck on his part since the Troll managed to hit the right image with his following arrow as well.
I even asked him what number he wanted to be and rolled the die in front of him.
The "he said himself that he should have thought about it but I really should have remembered it and asked him if he wanted to use it":
The monk wanted to teleport away from the troll once he figured out his chances of winning. He has made his Fort save vs. Daze this turn and really would like to get the hell out of dodge. So he tries to manifest Dimension Door, Psionic but needs to make a concentration check to not provoke. He fails, AoO which Daze and the rest is history.
He should have remembered his psionic focus, but more importantly, I should have remembered to remind him of it.
The bad part:
The monk and the wizard died.
The good part:
The pixie gained a lot more loot.
The group learned that playing blaster wizards doesn't work well. After I gave the monk player an Unseen Seer build he learned exactly how to play Wizards and got rid of his preconception that wizards were boring that always use up all their spells and had no power after just two encounters.
I learned that War Trolls are ridiculously under-CR'ed and I hesitate to use them nowadays unless I'm certain that they can handle it.
This was also the campaign in which the party was hindered by a single Druid through battlefield control, but they almost killed him. He had only the temporary HP from his Bite of the...weresomething to help him Wild Shape into a bird, flee and heal. After that encounter, they all learned about BF and now frequently use it.