Are mode C altitude returns valid for aircraft separation?
Yes, they are separated. Both according to mode C (in your example, there is 1,100 ft between them - not 900) and in general. It is normal for there to be small deviations in mode C in the range of 100 to 200 ft. If I have two aircraft crossing each other, supposedly with 1,000 ft in between, but the indicated (mode C) separation is slightly less, I will certainly ask the pilots if they are indeed at their assigned altitudes. If they confirm, then all is well. A pilot report generally overrules mode C (to the extend where there is even a procedure for asking the pilot to turn off mode C reporting if there is a discrepancy between pilot report and mode C).