Oh no.... attacking puppies

I know I've posted a lot of behavior threads since joining, but this one is EXCEPTIONALLY important.

I was playing with my brother's cavelier king charles spaniel puppy, playing tugofwar with a little rope. Chloe, the puppy, was growling while playing, and suddenly, Lyra(my 30 pound herding dog mutt) suddenly attacked. Instantly, I grabbed her and pulled her off and the puppy ran away screaming. She's fine now, not a scratch on her, but was very scared.

Also, Lyra has bitten a person before. He was on my porch and she obviously did NOT like him one bit. She kept glaring at him and was very tense. When he headed back towards his truck, she bit his heel. A warning bite, and not enough to draw any blood, but still a bite.

She was very poorly socialized as a puppy and basically is only comfortable with me and me alone. Everyone else, she is so scared of, and whenever I'm close by, she is so protective of me and is even more on guard. I guess its my fault for always keeping her with me and not letting her socialize with others, but I never saw it as a problem until she grew older.

Also, what should I do about the puppy? She's a show dog, she needs to be good with both people and dogs and not afraid of dogs. What can I do for her if this leaves her scared of Lyra, or worse yet, all dogs? :(

Uh oh! Poor Chloe! From your post, I garner that Lyra is definitely guarding you. I would nip this in the bud asap.

1) Nothing In Life Is Free: http://k9deb.com/nilif.htm
From now on, Lyra earns each and every resource. She wants dinner? Nope, she's gotta sit first. She wants attention? Sorry, she's gotta wait for her turn and you will initiate it. She wants to get on the couch? Not unless you say so. NILIF is all about teaching self-control.
2) Obedience. Unbridled obedience. Dogs who guard are either extremely insecure dogs or extremely dominant dogs. Lyra sounds more insecure than anything. One way to counter that is through NILIF (above) and lots and lots and lots of training. Training builds a solid, healthy relationship. Obedience training, in particular, stresses discipline and mutual bonding. If you haven't already, brush up on Lyra's basic obedience so that she will perform consistently 95% of the time in all types of places. That brings me to...
3) Gradual socialization. Because Lyra is an adult, you also have the added challenge of desensitization and counter conditioning. Essentially, you have to socialize in baby steps and make it EXTREMELY positive. Start slow (i.e. a quiet park). Just set out a blanket and lay there and allow Lyra to soak it in. Eventually, you can work up to high distraction areas like shopping areas.
4) You will also be doing desensitization and counter conditioning with strange people. Have a friend come over. Ask them to turn their head *away* from Lyra and toss treats in her direction. She'll inch closer, etc. etc. Eventually, they will be able to look at her and feed her from their hands, etc.

What to do with Chloe:
It's a two-way street. Yes, one attack can ruin a dog if you let the problem fester. Ergo, it's imperative that Chloe continue to socialize with SAFE dogs in secure situations. I do NOT recommend dog parks for Chloe, but rather a small playdate or playgroup with dogs and owners with whom you are familiar. Your brother's mentor should have a good list (I'm assuming his mentor is his breeder). Continue positive interactions, and she will forget the negative experiences.