"Many that live deserve death. And some that die deserve life. Can you give it to them? Then do not be too eager to deal out death in judgement. For even the very wise cannot see all ends."
"I wish it need not have happened in my time," said Frodo. "So do I," said Gandalf, "and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us."
Rather than guess or trust our memory, let's go to the source.
MORGAN: one knight loses 2 lives or each knight discards one white card. an unrevieled traitor refuses to discard a white card, but none of the loyal knights will lose 2 lives.
how is this situation resolved?
The card of which you speak is the Morgan #5. The Card Manifest in the Book of Quests on page 16 reads "One Knight may volunteer to lose 2 life points at once; or all Knights with 1 or more White card in hand must each discard 1 card, regardless of Loyalty or location in the game."
Step one: does any knight want to lose 2 LP. No. Then move to
Step Two: All knights holding White cards (including the unrevealed traitor) MUST discard a White card. The unrevealed traitor CANNOT refuse.
That's how it is resolved.