Lets see, reply on your question. Yes HTMLEditor should be in your cms-folder, like the old iRite was. (If you hade iRite in a diff. folder you should put HTMLEditor there.)
---- My Code ----
// WebAssist iRite: Rich Text Editor for Dreamweaver
$WARichTextEditor_1 = CreateRichTextEditor ("ContentValue", "../HTMLEditor/", "713px", "400px", "Default", "../custom/contents_insert_ContentValue1.js", (isset($_POST['ContentValue']) ? $_POST['ContentValue'] : "" ) );
---- End My Code ----
Your code looks fine, try change $WARichTextEditor_2 to $WARichTextEditor_1.
(Just tryed with your code, and it works good)
Make sure you have removed the old iRite requier _once from the contents_insert.php, around line 56.
When you have got all things to work, remove the old iRite-folder.
Hope this cleard things up for you, and that you not given up your hopes on it, lol :)