No, Lucy is not in "Time-out". Our next door neighbor has a Yorkie named Molly. From time to time Molly comes over to play with Lucy. They have a great time, but Lucy is bigger, stronger, faster, and has more endurance, so she wears Molly out. When we let Lucy out in the back yard she will go to the fence just to see if Molly is outside too.
And if she sees Molly through the fence they spend a few minutes exchanging greetings. There are a couple of places at the base of the fence where they can actually get nose to nose.