We had a showdown where one of the heroes was KO by the vampire, but his town elder (hunting party) remained alive. What happens to him? There was another hero still fighting and alive when that happened...
This is not addressed specifically in the rulebook but Jason Hill has made a clarification on BGG.
"Q: What happens to an attached elder if their hero is KO'd in a cooperative game? Does the hero return to town or do they attach to another hero? What if all the other heroes have elders or militia already?
A: The attached Elder returns to Town if the Hero is KO'd." (Jason Hill 10/24/09 BGG)
With that said, we always play it that the Town Elder stays with the party at least until the start of the next round. Thematically, it makes little sense for the Elder to just vanish because the Hero he was fighting next to is KO'd. Rather, the Elder plays his part in the developing scene and is still present at the start of the next round. If he cannont be assigned to a Hero because of the one Elder/Militia per Hero rule then he returns to town.
Town Elders are handled much like Militia and much like other allies in a showdown. Consider the case where there are two Heroes in the showdown and each with a Town Elder from the hunting party. In this case, the Militia will not be able to be assigned. The militia doesn't vanish however. They stay until they can be assigned in a later round. We reason that the case should be similar with the TE, though if he cannot be assigned in the next round then we do honor the intent of the rule that he is returned to town.
But per the designer's clarification the TE is to be returned to town when his Hero is KO'd.