Lily is a main character from Season 1: Santa's Curse. Lily died in Episode 3 of Season 1.
Lily is a transvestite bunny and Giant Bunny's sister. Before her death, she was in a relationship with Blue. She was the first victim of Santa's Curse.
The events that lead to his/her transvestite personality is unknown, but an episode may come out about it in the future (hint hint?).