Probably the code you are looking for is the function do_subdir in
liboctave/kpse.cc. This file contains a stripped-down version of the
kpathsearch library. Most modifications were to remove TeX-specific
stuff and to convert it to use std::string instead of plain C strings
which historically leaked memory. In any case, that function may use
an optimization to decide when to check for subdirectories. The
optimization looks at the link count of the current directory. If it
is 2, then the assumption is that the current directory does not
contain any subdirectories. That seems to work fine for Unixy
systems. Does that assumption not hold for Cygwin? If so, then I
think the fix is fairly simple as there is also Windows-specific code
in that function. Whether the optimization is performed depends on
what is #defined at compile time, so you'll probably have to do some
checking on a Cygwin system to see what is really going on.