What a mess

Sheesh...
I'd get up the board and tell them that some teams from div2 need to move up. You might want to work on a "promotion/relegation" scheme like the english soccer. If you are top 4 in tier 2, you move up to tier 1. Bottom 4 tier 1 move down to tier 2. Have 12 teams only in tier 1 and everyone else in tier 2. For the future that is.
You'll have to remove some of the "image" surrounding the div1 league. I'd emphasize it as the place to be with tier2 being the place for people that can't quite play due to slightly diminished mental ability

. You need to convince those teams that are winning by 10 goals or more that they need to move up. Maybe if your board buys a tier 1 trophy and nothing for tier 2 would be a way of shifting the focus. But right now, people are too preoccupied with playing in "tier2", rather than playing against an appropriate skill level. If you split the league into a "tier2a" and "tier2b", you'll run into problems when it comes time to assign people who go up to tier 1 and people who stay in tier 2 because the two tier 2s might not be a equal level of skill.
The board needs to set down what they want. If they try to keep everyone happy, this problem will get work and you'll end up with 6 "tier 2s" and no elite level ultimate and no development level ultimate. It will just be a mismash of craziness. If they set down what is going to happen, people will whinge and complain. And then they get over it. If a team deliberately loses while in tier 1, then they are wasting their money (that they spent paying for the league) and the board should consider banning them from tier 2

.
Its certainly an interesting challenge. I'd love to sink my teeth into it

. But it comes down to this:
- Get the board behind you.
- Change the image surrounding tier 1 and tier 2 (can do that by having the board put a bit more money into tier 1 teams, encourage teams to play tier 1, stuff like that)
- Set up a non-negotiable system that the tiers will opperate under. Teams are promoted. Teams are relegated. When tier 2 hits x amount of teams (tell everyone now so it isn't a surprise when you actually get that many teams), there will be a third tier set up which will opperate under the same system. Make the system public, have the public contribute too.
- Never threaten teams. You do not want to force anyone into playing anywhere. You'll need to convince them. Once you put the above system in place, you can say: "if you do get your butt kicked, you'll be back in tier 2 and there will be no harm done."
Apart from that:
Good Luck.