I'm not so sure they're nutty. I think they sound greedy and manipulative. And they've got their way, haven't they? Up to a point. They've got all your work so far for free, and a whole lot of supplies as well. They may well have pulled this stunt before, so if they do sue, try to find out who they've "collaborated" with before. Aside from that, you do seem to have come from the experience a wiser businesswoman. And you can be proud of yourself for keeping your cool. So breathe deep, and move on. Just hang onto those emails and whatever other documentation you have, since you may find yourself needing it down the line.