"If the kid is put up against one of your blackbelts, wouldn't the blackbelt have enough control to deal with this newbie? So, don't think our Newbie will be in any danger plus, Sensei is monitoring the sessions and won't let things get out of hand."
Release forms, at least the standard one that a conventional student signs, would be a layer of protection, but because your instructor is modifying and eliminating some of his curriculum if he takes on this student, then it really is null and void. As far as the BB 'handling' him, an untrained, undisciplined figher can actually be more dangerous because of the lack of restraint and patterns. He also creates a danger to himself because he will not have the technical skill to avoid overextension, overpowering and the ability to maintain balance. The teacher will be putting himself in serious liable risk.
"Now that I think more and read some of the replies, It came to me that if Sensei says "no way Jose," isn't teacher really saying that he can't teach anyone who doesn't start at point A?"
No, Sensei is saying that as an ethical/responsible instructor he will not throw out his curriculum at the whim of a student's demand. As an instructor, we establish a philosophy and goals. If this student's desired outcome and desired training approach in not in keeping with that philosophy, declining would only make the instructor - to reasonable people - seem true to his ideology.
"Seems Teach is on the hook here. If he says no, one might think that he really can't teach or doesn't have faith that his system can't absorb a challenge. If Teach says yes, don't see what anyone else has to say to him. He is THE TEACHER."
If he says yes, it might be interpretted as a decision based on money and as a comprimising of his system.
If he seriously is considering taking this student on, it would be best to set up a private lesson schedule where he isolates this guy, tells the student that he HAS to accept some basic technical training before he will be allowed to spar, reinforce the philosophical and character goals of the school and ask the student if he really thinks that this is the right place for him. This would keep this guy out of the eye of the rest of the students and reduce the 'preferencial/greed inspired decision' rumors. Plus the higher cost of private lessons might discourage the student's pushing.
If the guy agrees, GET IT IN RIGHTING! Then rotate some black/brown belt students as sparring partners in these private lessons to model the quality product of a student of the total package vs. this guy. Maybe, through constant comparison, the guy would come around and realize that he is missing out on aspects/understanding of what martial arts could be about.