>> Each song (Album) had a different (unique) image file.
Not sure what you mean by "song (Album)" which are two different things. Do you mean several tracks (songs) have the same Album name, and they had different images, and now MC has given them all the same image? If so, that can be "normal" behavior at times. If you change the image of one track, that same image often gets immediately applied to all the tracks that have the same Album name.
Apparently MC is hard-wired to treat a cover art image as belonging to an Album, therefore to all tracks of that Album, rather than to tracks individually. So, changing one track changes all tracks of the same Album.
It's a nice feature in many situations, but unfortunately it's not as controllable as it could be. To me, this "surprise!" change of other Album tracks based on intentionally changing the cover art of just ONE track is aggravating. There's no warning, and it can be time-consuming and difficult to locate the original images and reapply them to the tracks -- and still the risk of the change happening again. In another thread there's a "cover art wish list" discussion with suggestions for more control over this.
http://yabb.jriver.com/interact/index.php?topic=51381.0This is separate from the Folder.jpg issue. I don't know if it is affected by cover art image location, because I don't store images in my music tracks (bloats them unnecessarily), and instead store all my cover art images in a separate single folder.