Good news - there's been a significant change with the other side. Yesterday the girl in my daughters class, came to school with a card, friendship bracelet and eraser - on the card it said "lets have a 'do over' and can we be friends again' with a picture drawn on it The eraser said 'do over'. So my daughter accepted this and she had a good day - no problems with the older sibling at recess.
I think what was happening lately was - the older daughter was getting involved in this drama - carrying on the problem. I think the pricipal and the officer told the parents the oldest daughter was prolonging this.
Today my youngest is giving her a card which says - "thank you for the bracelet and yes I accept the 'do over' - we can be friends", along with a beaded key chain. I made it clear to the officer that I wanted this to end so the kids could get on with their life.
Looking back it would have been much better if the mom never came to my door - even though I was very kind to her. The next day after the incident, the principal spoke to the girls and she helped them solve this. I believe everything would have blown over at that point. So I'm very pleased it worked out this way.

The last thing I wanted was, for the kids to feel uneasy around each other and not feel 100% peaceful at school.
Thank you to all that supported me and allowing me an outlet for my frustration.