Hell hath no fury like an author scorned.
Yes, she’s being way too sensitive. As a developmental editor, you have a very valuable service to offer, and that service amounts to making their manuscript better. In order to do that, you need to identify what is wrong with it, what needs improvement, and—yes indeed—what sucks. To comment only on what you like about the story is the literary version of Thumper’s Rule: “If you don’t have something nice to say, don’t say nothing at all.” It’s like when your actor friend is trying out for a musical and they ask you for feedback on their audition song, and it’s gawdawful, and all you say is “…I really liked how expressive your eyes were!” You are doing them a disservice by allowing them to go into their audition thinking they have a good audition song, when really you are throwing them to the wolves. If you do not point out what’s wrong with their manuscript, then they’re going to present it to publishers before it’s ready and be fucking surprised when publishers hate it.
If the co-author thinks you’re “attacking” their manuscript, then she clearly doesn’t know what a developmental editor does. I think that at this stage it’s very important to completely stop what you’re doing and have a conversation with both authors about what you have to offer them, what value you will add to their manuscript, and what they can expect to see from you. Since it sounds like you approached them in the first place, you might need to simply rescind your offer as something they weren’t ready to receive.
At this time in my career, I very rarely do developmental edits for friends. So most of the editing I do is with authors who understand that I am refining their manuscript for publication, which is kind of easier because my authors all have a sort of “THANK YOU SIR MAY I HAVE ANOTHER” mindset when it comes to my feedback. But when I did do editing for friends, it was always a huge pain in the ass for just this reason.
A lot of writers secretly don’t want to be edited. They don’t want honest feedback. They want unbridled praise from all corners. They think anything less is an insult to them as a writer and as a human being. Well, sorry sensitive writers of the world, but yours is a publicly consumed medium. You have no control over how people react to your work. Every individual reader is going to have a different opinion, and statistically speaking a very large number of them might even hate it.
Don’t like it? Here’s a fucking straw so you can suck it up.
Working with a good developmental editor will increase your chances of having more people like your book. A good developmental editor is obligated to give you honest feedback on every aspect of your book. If that means they “attack” (read: point out poorly-written or developed aspects of the book in a professional and critical manner) your work, then so be it. Don’t dismiss their critiques. Don’t hate them for their honesty. Take their criticism, examine it closely, and ask them to help you explore ways to resolve the issues with your manuscript.
And then send them flowers and a nice bottle of Scotch with their bill because they just did you a huge fucking favor.
As you can see, this is a bit of a sore spot for me. But I’m glad you brought it up. You’re absolutely in the right, and you need to stop and have a serious conversation with the authors before doing any more work. If they insist on only hearing about what you like about the book, then you need to very politely decline to continue working with them. They are not respecting you or your profession, and if you enable their sensitivity, then they will expect the same kind of response from any editor they work with in the future.
Stick to your guns. You’re going to be a great editor.