A Rec league will set its own rules for eligibility. It is the responsibility of teams to follow the rules regardless of opinions about age vs. grade
In an age based league/tournament - ALL players must be age eligible regardless of the grade of the players
In a grade based league/tournament - ALL players must be grade eligible regardless of the age of the players
If a team has one player who is ineligible according to the rules they are cheating.
If a team moves up in division because of this one player, they are not "playing up" they are playing by the rules
the age people and the grade people will have have to agree to disagree, I like the idea of kids that will be playing with and against each other in school also play together in the summer. no system will ever be totally fair but grade based teams make the most sense to me