Thank you for taking your time to file this bug and helping to make
Ubuntu better. Does the above behavior only happen when you are trying
to open a Windows share or happen with the local filesystem directories
as well?

What I found Nautilus to be doing is it uses the Location mentioned in
the text box above the listings to use as the directory to create the
new folder. For example, if I drill down to /home/foo/bar1/bar2/bar3,
select bar4 folder in this directory and select File>Create new folder,
it creates the new folder in bar3 directory instead of the bar4
directory. As the Location path doesn't change when a folder is selected
causes the new folder to be created in the current Location path.

This might seem to be a bad behavior but makes sense considering that
you can select multiple folders from the current Location path. When you
have selected multiple directories then it doesn't make sense to create
the new folder in each of them, and hence it creates in the Location
path which is a single directory location.

In your case, please check what does Nautilus shows when you are at your
target location. If the new folder doesn't get in the shown Location
path, then it might be a bug. Thank you.

-- 
"Create Folder" in Nautilus is counterintuitive - does not apply to selected 
folder
https://bugs.launchpad.net/bugs/263500
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