Oh-oh. What do I do now?

Well. I am a bit stumped.
My sister went over to the barn last night to ride with a friend. I wasn't there. My sister is a great horse person, and knows how to handle horses and the things they do.
She called me up later in the evening and told me something that really disturbed me.

It was the first time she had seen the two new TBs, Montana and Spencer (who has still not gone to his actual home; we have just had no time to make the trip with him yet.)
She said after she and her friend got done riding Jett and Major, who were wonderful little dolls, she went into the paddock with Montana and Spencer to love on them a little bit. Then she dropped a bomb on me:

"Montana bit my face," she said.
"WHAT?!!!!!!!!!!"
"The big chestnut? That's Montana, right? He BIT my FACE."

Of course, my first concern was for my sister's beautiful face. She already had plastic surgery to repair a pet rabbit bite to her face, but a HORSE BITE?

She said it was sore and that the inside of her mouth bled from where she clamped down her jaw as he bit her.

My next concern was what she did about it. I usually punish my horses for biting. She was so stunned she didn't have time and he immediately backed off.

She went back to the tack room and got a jumping bat (just in case) and came back to the paddock, haltered him, and began petting him again to see if he'd repeat an attempt. He didn't; but her was clearly annoyed with the petting around his face.

Kevin said Montana had nipped at him when he was putting out the hay in the paddock the other day.

And thinking about a 4-H meeting recently, I remembered the kids hanging on the fence, trying to pet Spencer and Montana, and as I watched, I saw him getting really annoyed and had to ask the kids to step back away from him. I emailed a friend, jokingly, that he looked like he "....wanted to rip their face off........"

After last night this has obviously become an issue I will have to deal with.
Was he mistreated on the track? Was he hit around the head and neck area as a youngster? Is he just going to be "mean"? Should I just get rid of him now?

I guess I need to do some of John Lyon's "head shy" lessons with him and see how he responds. Teach him to drop his head kind of stuff. As I said, I usually punish a horse for intentional, mean biting. But I don't know if that is the right course of action here...... if he bites me and I smack him and yell at him, it might make the problem even worse, and he'll learn to hate me instead! How do I lovingly, but firmly, discipline a horse like this, who more than likely is this way because people were mean to him and made him so? I do not believe it is in his nature to be nasty. He's just continuing some kind of defensive reactionary mode held over from the track or something.
We've never had a mean OTTTB before. They've all been so sweet. Till now. Golly-Gee-Whiz. These OTTTBs are just not like other horses, mentally.
Darn it!