Played a quest the other evening with some friends, and we got into an argument over the wording of the Guard's behavior after activation in the 2nd encounter.

I don't have the rules in front of me, but the text in the questbook said something akin to "after activation, guards move to the nearest monster and attack". The interpretation of this line led for some rather manic kamakazee charges by the guards, and it became impossible for the heroes to protect them. Meanwhile, the winged boss monster just sat in one of the guard houses, protected by a wall of monsters. It became a brutally impossible scenario after about the 2nd turn.

Is there something that was overlooked in the rules that would prevent this? I do understand that some adventures tend to give the advantage to one side or the other, but this seemed a bit hopeless from the get-go. What have been your experiences with this part of the quest?

I've played this quest that you speak of as well and I was OL. You are correct when saying that the guards will attack the closest monster, be it monster or lieutenant. So if your OL decided to play a game of attrition by hiding to dwindle down the guards, that was strategy and a decent one at that. Nothing states that he has to keep his monsters out in the open or play them like bungling fools.

Oh, I totally agree - play to win. My frustration was that the guards have to play like bungling fools.