When I first read the Axeholm back story, I was struck by the tragedy it depicts, but also left dissatisfied. I also really hate the depictions of banshees as 'mean girls' twisted by their own narcissism, which I have to say I find problematic, and borderline misogynistic.
But the location has great potential! So I set to work on an alternate story. And what struck me was: what if Vyldara wasn't really sowing discord? What if she genuinely came in peace, and is an innocent victim of intergenerational cycles of distrust and fear? It seemed to me this would add to the tragic pathos of the place, and give a more satisfying explanation for her turning into a banshee, and the dwarves into ghouls.
I'm also a big fan of the work of French-American sociologist Rene Girard's work on the scapegoat mechanism, which helps explain how and why communities turn on an individual or small minority group, blaming them for the society's ills and internal conflicts, and casting them out or killing them. Think of how Hitler blamed the Jews for 'weakening' Germany, or how Trump united many in the white working class and the uber-wealthy by blaming 'Mexican rapists' and the like. Or just how school power groups form by picking on more vulnerable kids. Girard's found this process is basically universal across cultures and time. This theory gave me a reason for Vyldara to be blamed - and ultimately killed - for 'fomenting civil unrest' among the dwarves, as per the written adventure background.
Axeholm is a dwarven fortress carved into the base of a mountain fifteen miles south of Phandalin. The site was abandoned and sealed up long years ago after being haunted by a banshee — the restless spirit of a moon elf ambassador named Vyldara whose efforts to make peace between her people and this clan of dwarves unwittingly fomented civil unrest among the dwarves. Their divisions over whether to accept the peace deal led to internal conflict and infighting. The dwarf priest, struggling to find a reason for the dwarves' discord, concluded she must have cursed them. In so doing, he betrayed not only the elf, but the dwarves' own sacred laws of hospitality.
As they turned on her, she attempted to flee. Vyldara killed two guards trying to escape, only to be cut down by dwarven axes before she could succeed.
Whether driven by rage at her betrayal or as a curse from the gods, Vyldara was transformed into a banshee, fueled by the need for vengeance.
When the elf’s evil spirit started filling Axeholm’s halls with deathly wails, the dwarves abandoned their stronghold, but not before several dwarves slain by the banshee arose as ghouls to feed on their own kin (perhaps due to being cursed by Moradin for their sins). The priest, whose dark pre-emptive conclusions paradoxically triggered this tragedy, turned into a shadow.
Ghouls and other creatures now prowl Axeholm, while the banshee continues to haunt the fortress’s upper halls. The banshee senses the arrival of adventurers with its Detect Life trait. In its twisted, paranoid, spectral mind, they are yet more threats who must be destroyed before they destroy her. But if the party discovers the truth, there might just be a way to release her spirit from the material plane, able at last to rest in peace.
Handouts
This tragic story can be learned by the party through a series of diaries, belonging (in likely order of discovery) to the priest, elf ambassador and castellan. These are attached below. Note that the dating is from a previous age, not just 100-odd years ago.
Non-combat resolution
If the party tells Vyldara they have slain all the ghouls and the shadow, and that they have read the 3 diaries and know she is innocent, they can make 2 x DC20 Persuasion checks (ie. from hostile to friendly). Presenting the diaries, or a Dwarf apologising for his/her kinfolk's betrayal, grants advantage on one of the checks. On two successes, her soul is healed, and she disappears forever, able to finally rest in peace.
And here are answers to a few questions I asked myself, to explain the resulting ecology:
Why hasn't the banshee killed the ghouls? Because their suffering is greater this way - trapped in a fortress without food, it's a never-ending hell for them. She's immune to their attacks, so does not need to fear them.
Why haven't the banshee and shadow killed each other? The two hate each other viscerally, but are immune to each other's attacks. Thus they avoid each other, never straying into the same place at the same time. (Note: this requires an interpretation that the banshee's necrotic damage immunity also protects her from the consequent strength drain, and that the shadow doesn't die from the banshee's wail, which both make sense to me).
What about the stirges and spiders: these may zero sense ecologically, as written, given there is no food or blood source in the fortress to feed on. But both add to the evocative, haunted feel of the place, and have potential (if played tactically) for interesting combat encounters, so I'm keeping them. I understand these to have moved in quite recently, and feed on rats and the like. As they aren't warm-blooded beasts, the ghouls don't try to eat them, and the stirges ignore them.