That bit was full of things I didn't get at all. Thanks for sorting it out!
Grace


The byname <feilan> is actually a borrowing of Old Irish
<fáelán>, a diminutive of <fáel> 'wolf'.

> Eyjólfur Bölverksson var virðingamaður mikill [...]

> Eyjolf Bolverk's son was a man of distinction tall [...]

I'd make that 'a prominent man distinction'.

> svo að hann var hinn þriðji maður mestur lögmaður á
> Íslandi.

> so that he was the third greatest lawman in Iceland.

I think that it's 'one of the three greatest lawmen in
Iceland' -- literally 'the third man, [a] greatest lawyer in
Iceland'.

> Hann var allra manna fríðastur sýnum, mikill og sterkur og
> hið besta höfðingjaefni.

> He was of all men most handsome looking, tall and strong
> and the best highest chieftain.

<Höfðingjaefni> is something like 'a man with prospects to
be a chieftain'; it's saying that Eyjólfr was the best
chieftain material.

> Bjarni tók við honum báðum höndum og settist Flosi niður
> hjá honum.

> Bjarni received him with open arms and sat Flosi down near
> him.

<Flosi> is nominative and hence the subject of <settist>:
'and Flosi sat down near him'.

> ... því að yður eru tveir kostir til.

Uh-oh: 'tveir kostir' always means trouble!

> Annar er sá að biðja sætta og er sá allgóður,

> One is that you ask for reconciliation and that which is
> very good,

Here <er> is the copula: 'and that is very good', i.e., it's
a very good choice.

> hinn er annar að verja mál með lögum ef varnir verða til
> þó að það þyki með kappið að gengið.

> the other is to defend (the) case with (the) law if
> defenses are ready even though it seems that (you?)
> proceed with zeal.

In this context I suspect that <kapp> has more the sense
'obstinacy, intransigence', and <þyk(k)i> is a subjunctive:
'although that might seem proceeding out of obstinacy' or
something similar.

> Þykir mér því þann verða upp að taka að þér hafið áður með
> ofstopa að farið og samir nú eigi að þér minnkið yður."

> (It) seems to me at that then to be obliged to take (it)
> up that you have already behaved in an overbearing way and
> now no reconciliation?? that you lower yourself."

Here <þann> is the acc. sing. of the demonstrative pronoun
<sá>, referring to the second choice (of defiance), and
<taka upp> has the sense 'choose': '(It) therefore (því)
seems to me (that) that (choice) must be chosen since (at, =
því at) you have already behaved with arrogance and it does
not now beseem (<sama> 'to suit, to beseem') you to lower
yourself'.
Fred and Grace Hatton
Hawley Pa