When can a professor refuse to sign off on a committee-approved thesis? (Breakdown of a larger issue - full story here)

I did a masters research project as part of a grant project my professor received. Her project was to redo a standard, widely design using a new technology as a feasibility comparison, to see if the technology should be adapted as an accepted (possibly standard) design. My thesis project was to redesign key part of the original design in order to provide her with design parameters; we then iterated over each design twice more to finalize on common parameters.

It took a couple months to get clear criteria from the sponsor, and we finished a couple months behind schedule, but ultimately our work was a success. Our work was combined in a single dual report to serve as both my thesis and her official report.

Following my successful defense, with no changes from my committee, she bluntly refused to sign off on my graduation paperwork until she had official acceptance of the report from the entity funding the grant. She admitted this was an entirely separate issue but "wanted something to hold over my head in case they ask for changes". This delayed my graduation significantly, which has had serious consequences for my professional career. As far as I can tell, the was done solely for her benefit to secure full grant payment (to her) and not as any part of the school's needs or my graduation requirements.

If all the requirements of a prescribed study program are met, are there any situations when it would be appropriate for a professor to deliberately delay a student's graduation?
From a mere common sense perspective, this is, clearly, grossly unethical.  However, professors at most institutions are given a huge amount of latitude in making decisions of this kind.  That latitude is intended as deference to the professor as the one closest to the situation and a recognized scholar in the field, etc, etc.  It's not intended to extend to capricious or unethical behavior, but I'm sure your case is, sadly, neither the only one nor the most egregious.

As the professor has already departed academia (and good riddance!), there's not much to be done about that particular individual.  In a few years, though, you will likely be getting contacted by your alma mater frequently as they are very interested in what you would like to contribute, etc.

There might be some opportunity here to ask to speak to someone who will be interested to know why you are unable to donate.  Until they have clear policies in place that prevent the kind of abuse you were subjected to, you can't see your way clear to making contributions to an institution that, through their own negligence, damaged your career while it was in at its most vulnerable point.  Obviously there's no guarantee you will get through to someone who will listen, but it's worth a shot--if they do, it might prevent someone else from going through what you went through.

To anyone else going through this, get everything in writing.  "Why are you withholding your signature?"  Get a paper trail, or it's your word against the infinitely more powerful professor's as to what is going on.