It restricts nobles to 3 per village, with constant noble prices.
When they say you can train maximum of 3 nobles per village, what it means is that one village can only be used to produce 3 nobles.
Once those nobles are used up, then you cannot use that village to make new nobles. You have to make nobles from new villages that you conquer.
If you noble a players village from which he had already produced and used 3 nobles, you cannot make any nobles in that village anymore.
If you noble a village that has already nobled 3 other villages, then yes the village can be seen as *dead*. Only way to make nobles in it is if you or someone else nobles the villages that were nobled by the nobles from that village.