I guess I need at least ten reputation to post images, so here is a link to a screenshot of the entire workflow I have, and what happens when it is run on directories: http://i.imgur.com/St8Etxy.png
It's a custom action that I didn't write and I don't know where it is stored or that I can access it right now (currently no access to the server outside of the document root of the website). I'd be happy to provide code if I can.
This works fine for documents in the library, but it trips up on folders. The description of the error is 'An error has occurred in stop auto-inherit.'
Since it's evident that the custom action won't handle directories, could anybody point me in the right direction?