Another possible origin for the name is advanced in Patrick Hanks, "Dictionary of American Family Names" (Oxford, 2003). He says Kagi, Kaegi, Kagy, Kagey, and Kage are variations on a South German and Swiss word "Gehage" or "Gehagi" in Middle High German, a topological term meaning "hedge" or "fence," denoting an enclosed settlement in otherwise wild territory.
Alternatively, it could come from a dialect word, "Kage," meaning "cabbage stalk," an occupational term for a cabbage grower.
But neither of these is as interesting as your story about the bitter divorce which is contained in "History of the Kagy Relationship in America, 1715-1900" (1899) which is available in a reprinted edition from Higginson Books of Salem, Mass. See their web site for details. Higginson does a good job.