The situation I described occured at a seminar. There were about sixty people on the mats at the time, so I don't think the shihan saw what was going on. It took only a few seconds for the wrestling match part of the conflict to transpire and the whirling and twisting bodies crowded around probably hid the event from all but those of us closest to what happened.
Personally, I thought the whole thing was highly inappropriate. A part of me, however, recognizes that the yudansha deserved this moment of ignominy.
My shihan emphasizes rising to a challenge. Very often he himself is the challenge. He throws hard and pins harder. He tosses curves at you constantly during testing and, when taking ukemi for him, expects you to read his subtle attack signals well (a brisk smack on the head warns you when you are not). He will even scold you for being too deferential toward him. So, I am not too sure he didn't see the whole thing and let it happen to encourage the fighting spirit necessary to rise to a challenge. I don't think the contention between mudansha and yudansha indicates he is a negligent instructor. Tough, perhaps, but not negligent.
Thanks for the feedback on this!