Upgrading themes never works

Could not create directory is still a permissions error; have you checked Changing File Permissions « WordPress Codex? Are wp-content, themes and plugins 755?

Any file that needs write access from WordPress should be owned or
group-owned by the user account used by the WordPress (which may be
different than the server account). For example, you may have a user
account that lets you FTP files back and forth to your server, but
your server itself may run using a separate user, in a separate
usergroup, such as dhapache or nobody. If WordPress is running as the
FTP account, that account needs to have write access, i.e., be the
owner of the files, or belong to a group that has write access. In the
latter case, that would mean permissions are set more permissively
than default (for example, 775 rather than 755 for folders, and 664
instead of 644).

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