Yep, you've come across a bug on Apple's part. Following the iOS 5.1 update—and continuing in 5.1.1—all iPads, iPhones, and iPod Touches swap out unique Chapter names for generic ones. This seems to be happening with all Audiobooks, not just ones created using Audiobook Builder.
As soon as iOS 5.1.1 was released, we saw that the generic Chapter names issue was not addressed, so we went and bumped our bug report up at Apple. Upon doing this, we ending up discovering that the ticket is still open and unassigned, meaning it’s not being addressed—at least for the time being. We’ll check in again in a couple of months and let everyone know if Apple’s had time to look into it!
We usually post updates about stuff like that on our blog (
http://www.splasmata.com). So, check back on there every once in awhile for news about that particular issue.