In rockbox/apps/metadata.c in the find_albumart() function (after patching the source of course) search for. 


if (!file_exists(path))
  return false;


and relplace it with


if (!file_exists(path)) /* if it still doesn't exist, look in parent directory */
{
    char temp[MAX_PATH+1];
    strncpy(temp, dir, strlen(dir) - 1);
    strip_filename(dir, sizeof(dir), temp);

    if (track->id3.album && strlen(track->id3.album) > 0)
    {
        snprintf(path, sizeof(path)-1, 
	    "%s%s.bmp",
            (strlen(dir) >= 1) ? dir : "",
            track->id3.album);
            path[sizeof(path)-1] = 0;
    }

    if (!file_exists(path))
      return false;
}

Compile and thats it!
I see no reason why this would not work on other iPod versions as well