The extra partiton Ubuntu can't use may be preventing it from automatically partitioning.
You said "I shrunk my Windows partition and formatted it for a fresh Ubuntu install to dual-boot alongside Win7."
If you're able to shrink the Windows partition and you make sure to shut down or reboot Windows normally before attempting to install Ubuntu (that is, do not have Windows just hibernated when you boot the installer), Ubuntu should be able to make its own partitions. You said you shrunk down the Windows partition. I'm guessing you did this in the Disk Management utility in Windows or some other utility you're comfortable using (since you said you don't really know how to use the manual partitioning utility that's part of the Ubuntu installer).
But it sounds from what you said that you created a partition yourself for Ubuntu to use. Ubuntu will not automatically use this (and probably cannot, as NTFS is not supported and by default Ubuntu makes two partitions for itself).
Therefore, the best thing to do--especially since your preference is for Ubuntu to partition itself, and that appears most in line with your needs--is to remove the empty partition you made for Ubuntu to use. I believe the odd error installing GRUB is probably the result of incorrect manual partitioning. If that is the case, it should go away if you can get Ubuntu to make its own partitions.
After removing the partition you recently created, try booting the Ubuntu live CD/DVD/USB and attempting installation again. If there's free unpartitioned space on the disk large enough for Ubuntu to be installed comfortably, then Ubuntu's installer won't try to resize partitions, and it should just work.
...Unless your whole disk is formatted as a Windows dynamic disk. Ubuntu cannot install to such a disk. In that case you'd have to convert it back to a "basic disk" (or install to a different physical drive). You probably are not--Windows does not make your disk "dynamic" unless you tell it to--but it is possible.
Related information:
Shrink down the Windows partition manually in Windows, or leave it for Ubuntu's installer?
You asked:
I did everything exactly as you guessed/described. I have since rejoined that partition back to my Windows partition. Just for final clarity, you are telling me NOT to partition anything at all from my current, existing windows C: partition and to just run Ubuntu from the USB/CD and it should be able to create its own?
Ubuntu's installer should be able to resize your Windows partition, but sometimes it is not able to do so (even if you are not currently hibernated in Windows). Since you are able and willing to repartition in Windows, I think it does make sense to create space for Ubuntu in Windows's Disk Management utility.
However, this space should be unpartitioned. That is, it should not be a new additional partition, just empty space on the disk with no partition in it. This is the result of shrinking down the Windows partition without making a new one (or alternatively, of deleting the new one but not expanding the Windows partition).
