It doesn't seem like this was fixed, or maybe it has regressed, but I'm
having the same issue with 14.10, when a security update takes the
kernel from 3.16.0-23.24 to 3.16.0-31.43.

I happened to use Universal-USB-Installer to create my persistent live
USB copy of Lubuntu, then I used gparted to make a larger casper-rw ext2
partition than the 4GB FAT32 file limit, but that probably doesn't
matter.

I get the cryptsetup warnings like everyone else, but that's only a
canary in a coalmine, as you can simply remove cryptsetup, and the OS
*still* won't boot after installing the updates that cause this.

I also tried Colin Watson's workaround before running the update, and
this did *not* help.

So, to reproduce the bug, all I have to do in Software Updater is put a
check, under security updates, next to "Generic Linux Kernel Image" and
then run the update -- also, any other update that *depends* on the
kernel image being updated also causes the issue.

On restart, I get ""(initramfs) Unable to find a medium containing a
live file system", and it won't boot into Lubuntu.

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https://bugs.launchpad.net/bugs/932663

Title:
  kernel upgrade failed on a USB live system created by usb-creator

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