A co-worker asked me if I could make her a red velvet cake, I said sure, then she said I'll pay whatever you charge. I charged  $40 and I made the cake from scratch 3 layers. I don't have a business I just love to cook. The next day she told me she wanted to get reimbursed  $30 because she was not satisfied with the cake. She took a bite of the cake and didn't like it. I told her I wouldn't reimburse her so now she is filing a complaint on me and taking me to court.

I don't know what to do? 

Anybody can take anyone 'to court' but seldom will someone win a legal case because they did not like the taste of some food item unless there was something very wrong w/the item - like it made them sick.   She is just trying to scare you into returning her money.   Yes, she can start all kinds of rumors and bad mouth you but you just have to ignore it and take the high road.  Do not try to bad mouth her.  If anyone asks you about it just tell them she didn't care for what you made for her - end of story.  

Thank you for the replies. I feel better now

I know what I'd do...I'd refund her the money, put her on the "no cake for you" list, then I'd make a bunch of cupcakes of the exact same flavor and take them to work to give to everyone but her. 

Yep!

Hahahahaha I like it!

What you have experienced is unpleasant. Following custumeczar's advice will definitely help at work, with your colleagues. And refunding her money will help with other potential issues, because it sounds as if you don't have a legal business. If you want to continue selling, I suggest looking into the legal aspects of running a business. And I'm sorry you had to deal with this.