Ah, Ok.. I also understand this much better now. I think the main problem I have with this, is the total transparency of the transactions. The only tx that will be auditable will be the settlement tx on the Blockchain and the tx when the channel is opened. The 1000s of tx's that are done with the channel is not auditable. 
How will this be handled in a dispute?
How will this be handled in a dispute?
Interesting question. I think asking both parties to share all transaction/HTLC would be fastest way, even though there's anonymity/privacy concern to both parties and anyone who use their channel to route transaction.