This bug appears because on live systems, new initrds are written to
/cdrom/casper/initrd.lz.new (see special treatment of live systems in
/usr/sbin/update-initramfs starting from line 9).

If you create a persistent live system via Startup Disk Creator and pull
the "How much" slider to the right as far as possible (what seems
sensible for most cases and users), all space not used for the system is
allocated for that documents-and-settings-ext2-file and there is no
space left on /cdrom. Therefore update-initramfs fails with that cryptic
lzma error code.

Perhaps Startup Disk Creator should leave some spare space on the live
medium even if the user chooses "use all remaining space available for
my live medium".

-- 
package initramfs-tools 0.92bubuntu71 [modified: usr/sbin/update-initramfs] 
failed to install/upgrade: lzma: Encoder error: -2147467259
https://bugs.launchpad.net/bugs/562312
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