Two Macs using separate Time Capsules on same network - The operation couldn't be completed. (OSStatus error 2.)

Six hours of configuration and I'm out of ideas.
Here's the layout:
Cisco Cable Modem connects to my ISP. It uses DHCP to distribute IP addresses which is necessary as ethernet throughout the house is piggybacked on coax and the ethernet to coax adapter has a mac address and needs to take an IP address (DirectTV - not my idea). Though not my preferred config, this seems solid.
Cable Modem connects via ethernet (though this crazy coax adapter) to Downstairs Time Capsule (call it DTC). DTC is set to create network without using DHCP so that no duplicate IPs are dished out. No problems so far - everything works. DTC has a MacMini hooked up by parallel ethernet and the MacMini is set to back up to the DTC disk, called "Combo Time Machine". Back up is running smoothly, no problems.
On the same network there is another Time Capsule connected, called Upstairs Time Capsule (UTC). UTC is set to create network in bridge mode so as to repeat the network created by the DTC (to increase range). All of this is, network-wise, is working fine:
UTC is connected by parallel ethernet to an iMac which I want to back up to the UTC disk, called "iMac Time Machine". This is where the problem starts. It seems logical that one Mac could backup to one Time Capsule while a different Mac back up to a different Time Capsule, even though everything is on the same network, right?
So here's what I see while using the iMac to try to configure Time Machine upstairs:
Looks good, right?
It's as if the Time Machine software confuses the two Time Capsules - it's asking for the Downstairs Time Capsule disk password, not the Upstairs one as it should be. Still, I try the password and here's what I get:
"The operation couldn't be completed. (OSStatus error 2)" means nothing to me... little help?

I have an idea this is going to take some working out.
What IP is the upstairs TC and what IP is the downstairs one?
Can you ping them both please by name and by IP address?
Can you manually mount the share you will use for time machine in the iMac upstairs..
In finder go, connect to server.
Type in the name AFP://user@TCname
You will then be asked for the password and it should be able to be stored in the keychain. Then select that for TM.. if TM still carries on, reset it and try again. See A4 here.
http://pondini.org/TM/Troubleshooting.html
The double entry and refusing to join the right disk is a Mountain Lion trait.

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