"idea was rejected by (offended partys') legal team" should never be the conclusion of something like this; but I can understand not wanting the trouble for a work of passion.
In fact, working on a mod for a game -- and then getting legally threatened by the owning company of that mod platform -- would entirely drain my enthusiasm or passion for the game/company/platform.
If you read the mod maker's actual note, you'll see that they were not "threatened" but rather they entered into a dialogue with a team they respect and want to maintain good relations with (video game mods are often a path to employment in the industry), so they chose to halt development when Bethesda said they couldn't allow it.
These conversations can be civil and respectful, even if the outcome is not ideal.
In fact, working on a mod for a game -- and then getting legally threatened by the owning company of that mod platform -- would entirely drain my enthusiasm or passion for the game/company/platform.
I hope the mod-makers feel similarly.