Well, I've yet to start over to see if that part is still bugged, but I did finish Chapter II. I had a lot of trouble getting the other two team to fight each other in Sweegy Woods, but once I figured out how to do it, the battle got much, much easier. After that point, the rest of the chapter felt like a breeze.
I'm trying to decide if Reckoning is overpowered. Only one of my characters seemed to do much damage with it, but when 4 out of my five character were using it, all I had to do was run away while casting Reckoning. This strategy would just chip at them, but kiting was rather effective. It makes using Lightning Stab and Judgment obsolete.
Also, Steal is a phenomenal skillset. Steal Armor often does more damage than attacking. Poison bomb is almost a necessity for high HP monster encounters, and whatever the skill is that adds Don't Move (Blowdart, maybe?) is a must for the Move HP-Up encounters.
One suggestion I have for the three way battle is that the two guest knights need to start with equipment that does not give them perma-slow. They get double turned by two teams before they get to do anything. Maybe that was part of the challenge, but it was hella annoying.
P.S. I love what you did with the Tonberry. 1 move, plus super speed, plus hyper-lethality was awesome.