This error is fixable in a very direct way:
1. Open problem ePub in Calibre editor.
2. Go to Tools/Table of Contents/Edit Table of Contents). Press Ctrl/A to highlight entire TOC at the left pane and press Del to clear the left pane.
3. Select Generate ToC from file, press OK and Save (or Save As) the file.
This will provide kindlegen with needed functionality and the final ToC in resulting mobi will be correct.
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