Pff, let the dice fall where they may. Kill 'em all, let the Gawds sort them out in Pharasma's Boneyard. Take the loot and move the lair. If they have a castle, families, followers, children ... burn them all to ash.
This is a dragon - a red dragon. He may be trying to become all non-evil and stuff, but the local heroes invaded his house, killed his pets and ruined his mosaic tiled floors. They and their kin must suffer for this outrage!
The lesson: no one provokes the wrath of a dragon, fails and expects no consequences. They may not live to witness the dragon's wrath, nonetheless wrath there shall be.
Smaug Jr shall NOT be slighted in such a manner!
^^ This I love!! lmao
If the goal of the dragon is to actually become good, then the 'heal the survivors but make them serve him' is a pretty good idea. At least some of the characters ought to die, however, and rolling for random possibilities is likely to cause at least one to die.
Scenario: Once the dragon realizes his foes are dead, it takes a will save, say, DC 21, for him to become calm again. If he fails, he CDG's the nearest character or, if more than one is adjacent, roll randomly. He then comes out of it from the realization of what he's doing (or make him roll additional will saves if you want). If he has any healing spells (he probably doesn't), he can use them. Otherwise he has to find healing items in his treasure hoard, or a healing kit to make heal checks, which are probably going to be unskilled, but his wisdom is pretty good. If he has minions, maybe one of them can heal. While he's locating a way to heal the PCs, they're continuing to make CON checks to stabilize. Some of them may find their HP dwindling away as they fail, with the penalties due to damage growing ever larger. This will require a great deal of self control on their parts, so you might want to institute a 'temper tantrum = automatic death' rule if they seem unlikely to accept failing rolls with equanimity. Stress to them that you are under no obligation to even allow them to survive -- the dragon could easily kill all of them, including the cleric -- and if they cooperate and the dice favor them, survival is possible.
Assuming they stabilize, there will probably be time for the dragon to locate some kind of healing item, or at least start to make unskilled Heal checks. An unskilled heal check with a +3 WIS modifier isn't terribly difficult -- indeed, with a healer's kit (+2) he could take 10. Each check, spell or item use takes a round, of course, and stabilization checks will need to be continued to be made.
Assuming he gets a number of PCs stabilized, the logical thing for him to do would be to then focus on healing the cleric up to at least 0 HP, so the cleric can heal the rest. Charm Person and suggestion spells will help to make the cleric amenable. If the cleric dies, then any wise-looking PC could be recruited for the purpose. Also, healing items in their inventory could be used. You could have a magical item that allows use of Charm Monster, even though the dragon isn't normally able to cast 4th level spells, or a wizard minion who is. Charm monster on all the PCs would do the trick for a while. Extended Charm Person could help, but geas or dominate would be more reliable. The best option would be for the dragon to convince the PCs that their best opportunity to survive would be to serve it.
Minions would help the most here. With assistants, the dragon could keep all the survivors unconcious until he was ready to revive them, and make sure they were subdued.
As a player, I really approve of having danger in battles. Death should be a real threat, and furthermore I love dismemberment, scarring, and other consequences of griveous wounds.
But TPKs are an entirely different matter. Nothing harms a story line more, than having to roll up an entirely new crew of adventurers who have no tangible connection to the previous plot lines. While you can make up excuses as to why the new characters should continue where the others left off, I often feel left with the feeling that my new character don't actually have a reason to invest his life in the current adventure.
Consequences should be real, but in my experience TPKs doesn't provide it. My worst example is our RotRL game where we had three TPKs. At the end of things, I got pretty disillusionized by it, not caring especially much about my third or fourth characters. Knowing that "someone else is going to come along, eventhough we die" doesn't incite the wanted feeling of "battle is dangerous, I need to be smart not to die".
I think your situation provides with excellent opportunities for continuing the game with the same characters. I thing having the perform some service for the dragon is the most interesting.
In the given situation, it would be reasonable for the dragon not to kill of the cleric. After all, he ran away as it suggested. As his anger wears off, he might heal the cleric of the worst wounds, ensuring his survival.
The beaten down cleric could wake up in a cell, with or without equipment. Without any other options, he will have to plead to the dragon for his freedom and (hopefully) his comrades corpses to bring them back to life.
If the dragon, as described, is truly interested in changing his nature, it should be possible to find a solution. Of course he should ensure that they don't just come back to kill him, magically or otherwise. Secondly having them perform some favor, might actually make them instrumental in the dragons transgression toward good.
The PCs are 13th level and the dragon gave them chances to retreat, it seems unlikely to me they couldn't, they were too proud to run period.
I'd say the dragon is well in it's right to take their treasure and eat them, to add further failure have the dragon return to it's evil ways as a result of the PC's actions. Having ne characters meet up with the dragon 'might' be a good idea, but you run the risk of losing another party and metagaming..