I really dont think that the hamster eatting the paper and its unfortunate death were linked. Like Gillzy said, a paper towel would have been broken down in the stomach acids fairly soon after eating and it would have been through the digestive system within a few days at the most, it wouldnt still be in the body after 10 days. Also it wouldn't cause excesive drinking, if you get a piece of kitchen towel wet it absorbs the water and then thats it, it can only absorb so much. It would have filled up simply from the saliva in the hamsters mouth so that by the time it reached the stomach it would not be able to absorb any more fluids. This was probably just a mistake made by the owner because they couldn't explain the hamsters death in any other way, it is highly unlikely that it is true though.
Either way if it is true or not this seems to be a one off case anyway, dont be discouraged to use toilet/tissue paper bedding as it is nice, soft and safe for hamsters.