Absurd. Flat out absurd. When the DM allowed the Evil cleric into the party, he explicitly or more probably implicitly not merely gave the paladin carte-blanche to turn a blind eye to the cleric's misdeeds, but rather explicitly implicitly instructed the paladin to ignore them flat-out. Anything else would be dishonest. More loosely, the DM made the (again probably implicit) statement that no real problems would come from the cleric's actions, unless the cleric was really asking for it, in which case the DM would need to give clear warning. Remember: the DM is, clearly, making exceptions to the normal rules here. Players cannot guess where the DM will draw the line.
I'm guessing that here the DM gave merely hinted warnings that he *thought* the players *had* to pickup on, but they didn't. So the lesson here is twofold:
firstly, never, ever, assume that the players will pickup on hints.
secondly, if such a situation should come to unfold, it is the DM's fault and no negative consequences should hit the players.
wow that is wrong i would often drop sudle hints to things and when the players did get them wham smack the crap out of them
secondly your right in your world of DnD you can't have an evil priest hanging with a pally. true enough. but what it the pal had other plans like staying around the cleric in order to counter act any evil he might have planned. being a tattle tale on the priest in this story seems like that might have been likly. now that being said the pally should have smashed the zombies dead the moment they were set free.
on to the posters topic
i like the idea of a punishment but it seems to be that your players might take a diffrent standing than you want if you try and imprison them like i don't know kill the entire town rather than let them take any of there magical gear/ property.
i had a necromancer in a game and a very similar thing happened up the the first part of your description. where he forgot not to wonder in to town with a bunch of zombies in tow. but the village didn't come out and talk they straight attacked. believe it was an evil wizerd coming to disrupt there way of life. what did my party do run? oh no they proceed to kill every last villager (only like 60- 70 people) and then raise the entire thing as apart of his undead horde. and took everything the poor village had to offer. to the point i wanted to scream. as they tore apart the wood buildings and made them in to carts (fabrication spell) so they could tear down the stone building and load the rock on the carts. it was a very fun game after that as they continue to expand the undead army but he learned after the first village to never wonder in to town with undead in tow unless you wanted to destroy it. (how ever in my game no one played a pally or any lawful/good)