I came across her while clearing a random dungeon. Frostmere, I think. She was a tough [censored] with the same model as a Whispmother, and I found the Pale Sword, but... Nothing happened. When I put the sword on the stand, nothing happens. Is anything supposed to happen? Am I missing something? Was this supposed to be part of a quest? Who's the Pale Lady? Meh...

putting the sword on the stand just banishes the pale lady. if you've taken care of her then enjoy your new sword. however, per wiki: "You can enter the crypt without triggering the quest. In this case all the quest steps will still take place, only you never get any text in your quest log, and the journals are stuck in your inventory."