Translation
When he raises his arm with the dagger in it, I immediately put the sheath of my sword on his dagger arm, so that there is no way he can trouble me. And immediately I draw my sword, and I can wound him before he can touch me with his dagger. Also I can take the dagger from his hand in the same way as the first dagger master. And also I could bind him in the middle bind from the third play of the first dagger master.
Interpretation
As the 2nd master of sword vs dagger, you were walking along minding your own business, carrying your sheathed sword by the hilt, and holding the scabbard with your left hand as it rested by your left shoulder. Suddenly and unexpectedly, you were grabbed by a reprobate intent on stabbing you. Although taken by surprise, you are nonetheless prepared, and respond as the scholar shows.
With the sheathed blade, use the sword as you would a short staff. Strike down into the crook of your opponents right elbow. Hit exactly where the elbow bends, and the arm will collapse, jamming the attack. Your sword will be aligned such that you can draw the blade back, loading it for your own counter attack, as shown in the drawing. Attack them as you chose. Using the sword as an oversized dagger and making a sottano stab into their solar plexus is the easiest option.
The scabbard acts as an extension of your hand. As your opponents arm collapses, the point of the dagger should slide down the inside line of the scabbard. This means you will have effectively made the cover of the 1st master of dagger. Fiore gives us several different options as to how to take advantage of this.
The percussive shock of being struck on the tendons like this tends to cause the hand to pop open. You opponent will momentarily have a loose grip on the dagger. Use the elbow as a pivot point and lift and turn your hand to the left. This applies leverage to the base of the dagger blade, stripping it from your opponents hand.
In order to jam the arm fully, you could also try pushing the scabbard while winding it in such a way that the tip goes over the back of the arm and anchors onto the chest. This would tie up the arm and keep your opponent at a distance, leaving them wide open to attack. Attempting this requires a large movement on your part which would be quite difficult to perform confidently in the high stress environment of fighting your way out of a murderous surprise attack.