Just to verify that when you play Cornelius you have to put another gnome to sleep. If you can't put another gnome to sleep, then you can't use Cornelius?
Correct. You can't use him as a gnome, but you can still use him to "pass".
Can you sprout less than three mushrooms?
If you are in a pinch, and you have another gnome, but only have two mushrooms to sprout, you can still use Cornelius this way, but it doesn't sound like a good strategy to me.
Cornelius is definitely one of the more tricky cards to use.