legal issues? pretty sure there would not have been any legal issues. The other artist may have made a request to not use their art anymore, but they wouldn't have had to honor it.
Still this game would have been better off continuing from where the first version ended and maybe take in to account changes they wanted to make and slowly redo the first part.
It's taken way too long to get back and updates with no content isn't helping their old supporters or getting new ones.
I do agree about the art though, it's clearly worse, but it's pointless to cry about something out of the Devs hands.
That depends highly on the countries those people live in, here where I live you'd get into serious trouble using assets and art that doesn't belong to you & I wouldn't be too surprised if the artist made sure the Dev never had the rights but instead they stayed with the artist.
Which, of course, would be foolish on the Dev's end but so was hiring an artist who doesn't feel comfortable about lewd scenes for a game like this. Still I get it, since, well, it would be kinda hard to turn down someone who is so clearly talented and capable.
I do agree with you on the rest though, this game would likely do better if it had not tried to start over from scratch, and I say that despite only being interested in the lesbian romance, of which there was none (basically) in the original release.