Laini26:
If you leave your kids at your MIL's house, then her rules apply. If you don't like the rules, then don't take them to the MIL's house. I think the crazy MIL was totally out of line here, and owes you AND the kids an apology, but she doesn't need your permission to discipline the children (within reason) while they are her responsibility. You chose to send them over there; you submitted to her authority. I'm not saying she can beat or otherwise abuse them, but yes, she's within her rights to put them in timeout.
The issue wasn't really anything the grandmother did punishment-wise (and the letter writer said as much) but that a stranger who doesn't even live there got involved. Not only is that completely inappropriate, it's also simply bizarre. You're visiting somebody else's home (not even a blood relative) and you end up spanking their grandkids who you apparently haven't even met before? It's impossible to come up with a string of events that could lead to something like that.