By the letter of the rules, the ump in your game was correct. Only specific calls from the umpire make the ball dead, like "Time", "Foul", "Balk (NFHS)". Other communications like "strike", "ball", "out", Fair (pointing not verbal), and many others do not create a time out.
That said as others have indicated since "everyone" had it wrong, the better course given the level of play, would be for the umpire would probably have been to call "Time" and put the players back where they belong.
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