That sounds familiar to me too. That directory limit is the issue, due to file-path length limits, if the nesting exceed that values you get errors when performing manual backups with File Explorer (Windows Explorer) even in NTFS. I see this all the time on Customer machines who nest 10, 20 levels deep or more without realizing there are limits to the file path length on a filename.
They simply believe it's infinite, which of course it's not; and when doing automatic backups, most folderized backups have a checkbox to turn off or skip copying of files which come up with a filename length error, so those files which there can be hundreds or thousands of never get copied to their backup media).
Also, not too many W7 computers (OP posted under the W7 sub-forum so I'm assuming that's his windows version) were built with FAT32 on their C: bootdrives as you are aware. That practice was abandoned by most of the OEMs anyway in W7. I've seen a very few machines still using FAT32 in Vista, and of course XP. Of course, if this is a self-built PC (we don't have that info from the OP), all bets are off as if he intentionally formatted his C: drive manually with FAT32 for compatibility with older games or something, the directory limit and filename character limit is more of an issue as you said. I've also seen customers who borrow a Windows disc from a friend and reinstall their W7 using this option, or if someone tells them how to do it, they format their C: drive with FAT32 which hasn't been done for years as we know. Also some older accounting programs won't run on a NTFS C: drive, example is one of my Customer's
QuickBooks who uses that system for a POS retail purpose. Their old system was XP running Quickbooks v11.0; Intuit dropped support of that version (and the C: drive was formatted as FAT32 in XP) and forced us to upgrade their entire computer to W7 running NTFS on C: running the newer Quickbooks v12.0. We had no choice on this OS upgrade and windows C: drive partition format, as without it we would have lost our ability to perform Credit Card transactions to our Bank on POS purchases. Intuit, as does Peachtree and most other companies today will not support their software on any system using FAT32 formatted C: drive regardless of the windows version in order to run modern versions of their software. [of course, there are always exclusions to this, but not many.].
BBJ