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OK - I know I'm necroposting an old thread - but I've encountered this same issue. As far as I know, it's just a bug in the nook.
If, like me, you have all your books in calibre and side load them to the nook, there is a workaround. There are at least two ways in calibre to flatten a nested TOC - the Modify Epub plugin, or the native calibre TOC editor. I use these to flatten the TOC on my books to get around this bug.
The other complication is that I don't usually want my books' TOCs forever flattened just to get around a nook bug. For this reason, I copy all newly purchased books to calibre library I call "staged" where I temporarily hold books to be copied to my nook. I flatten the TOCs (if necessary) here, and then delete them after copying.
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