How could she pursue this now that she knows you had friends at the BBQ that ate the cake she says she threw away? Was this woman this fried when she booked the cake?
I vote for Doug's reply.
I'm in a mood today, and I am just sick of people pulling this crap to save a buck or two, with no regard to the harm and damage they will do to a person and/or that person's livlihood and business. I'm sick of people who haven't learned there are repercussions for their actions.
I'm just sick of 'em all!
Seriously! I'm just a hobby baker, for friends and fam and it pretty much looks like I'm going to stay that way.
WTH is with all these people threatening to sue or slam someone's business into the ground if you don't give in to their extortion?? Is there a new classification of lawyers that just do cake cases now? I bet these are the same people that wore their prom dresses, tucked in the tags, then tried to return them the next day, make-up and deo stains and all " no I never wore it, it just didn't fit I swear!" 
At this point you need to stop answering her emails and block her on FB. She'll figure out that you are not giving in to her.
script:
Well, xxx, you know I talked to.....(list names of all the guests you know and talked to)... and everyone of them told me how much they LOVED the cake that you DID serve to them. Funny, none of them mentioned a hair, that you found a hair or that you threw the cake away.
I guess I'll just have to speak with my attorney about filing a defamation of character/slander lawsuit suit against you. I'll be having those guests as my witnesses that you did serve the cake, that it was edible, that you never mentioned any hair and that you did not throw the cake away.
If you want to discuss this further, here's my attorney's phone #:
DITTO!!
First of all, she never spoke with a lawyer because if she was too cheap to pay for your cake then she would never pay to speak with a lawyer But let's say she has a lawyer friend -- well that friend would have said that without the hair and cake she had nothing. She's been caught in a lie and is trying to bluff her way out of it Keep all your emails and you'll be fine.
Hubby is always saying you can tell when someone is telling the truth because they tell one story and one story only. But when they are "making it up as they go", the story keeps getting better and better.
There was hair in the cake.
There was hair in the cake but I threw the cake away.
There was a LOT of hairs (PLURAL!) in the cake that I threw away.
Making it up as she goes!
Anyone who is being truthful will have a consistent story. Not so with this lady. Any word from her lawyer yet? LOL Unbelievable she has no proof what so ever that anything was wrong with the cake.
I think it might be time for you to get a lawyer to write up a note for you, basically letting her know that slander and libel are serious and engaging in those acts have repercussions.
I mean, she threatened you with a lawyer and lawsuit, it's only fair you nip this in the bud now.
Good luck!!
I would send her a note back and say that you are sorry she feels she has to take legal action and that perhaps when she does call her lawyer she should decide which story she would like to stick with - one hair or many hairs. Also, ask her to ask her lawyer if he would like a copy of her e-mail to you cancelling the cupcakes and if he would also like copies of the statements that your lawyer is putting together from the witnesses that were at the party and who contradict her story. Of course, you know you are not really doing that (for now), but she won't and then let's see what she says.
I have a confession to make: I am a mammal. I am entirely covered in hair. Entirely. One might slip out on occasion despite the best precautions. My bad.
Ha ha! Mammals should not cook or be around cake...LOL. She'd be mortified if she realized all the skin cells that fell into the cake, too.
Don't give in. I really doubt that she is going to hire a lawyer. It's going to cost her more money than she paid for the cake. Did you let her know that you talked to several people from her party and she served them the cake when she told you that she threw it away. Her story doesn't make sense. Also let her know that she should be careful on what she tells other people that you have several people that attended her party and praised your cake and can't wait to place an order. That you will request written documentation from friends who attended her party. I bet she will back off.
I have a confession to make: I am a mammal. I am entirely covered in hair. Entirely. One might slip out on occasion despite the best precautions. My bad.
How DARE you!! Don't you know that being covered in hair is not only bad etiquette, it's against health code! *gasp* And what is this mammal garbage? You plainly know that all bakers are underhanded, overcharging snakes. Snakes are NOT mammals! I want you to go take a time out and think about the terrible things you've done!! 
I think you have these types in every single business out there. They spend too much money on the party and they want a way to get some of it back. Or they think they can pull this and get away with having parties for free. She probably did this to every vendor she does business with! And its really sad, because it really leaves a sour taste in ones mouth with dealing with the public or doing something you truely love.
I had a part time job as a nail technician. I worked in a small salon that was in a major department store. This lady came in and asked to have her hair cut. So the girl cut her hair. She asked for it to be curled but didnt want to pay for the blow dry. The girl tried to explain to the lady that she could not use her curling iron on wet hair. The woman kept argueing and then got up and walked out without paying for it! That was her goal in the first place! Ofcourse mall security held her and she was arrested! But Im sure she didnt stop trying to pull this on other people.
Just dont let this lady get you down. You know in your heart that it was fine and since you have 8 people to back it up then dont make yourself nuts. Give her the number of your lawyer and tell her that you will no longer be communicating with her. That she should direct all her emails, etc. threw him. And then really, dont email or talk to her anymore. Hopefully she will realize she messed with the wrong person and leave you alone. If it ends up she is truely off her rocker then her lack of evidence will be proved in court.
That was her goal in the first place!.
Yep! Hubby tells story after story after story about customers he's seen in the dealership who he can tell from the git-go that they walked thru the door PLANNING on finding fault with something so they could get it free or cheaper.
I was telling someone today about 2 potentials that came to my shop and I never even sent them the quote because I just knew up front they'd be the "this wasn't perfect so I want a full refund type." Nope! Just not going to deal with these types!
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