Folder.cs

//a class that has a parent id and contains a list of children
public class Folder {
	
	public int Id { get; set; }
	public string Name { get; set; }
	public int? ParentId { get; set; }
	public List<Folder> Children { get; set; }
	public int Level { get; set; }
	
}

FolderListNest.cs

//a utility class to nest a list
public static class FolderListNest{


	public static List<Folder> NestList(this List<Folder> list){
		//find roots
		var nestedList = new List<Folder>();
		var roots = list.Where(x => x.ParentId == null);
		
		//set children for each root 
		foreach(var root in roots){
			SetChildren(root, list, 0);
			root.Children = list.Where(x => x.ParentId == root.Id).ToList();
			nestedList.Add(root);		
		}
		return nestedList;
	}
	
	private static void SetChildren(Folder root, List<Folder> list, int level){
	
		//if this has any children
		var allChild = list.Where(x => x.ParentId == root.Id).ToList();
		if (allChild.Any())
		{
			level = level + 1;
			
			//check if each child also has children
			foreach (var c in allChild)
			{
				c.Level = level;
				SetChildren(c, list, level); //recurse!
			}
			root.Children = allChild;
		}
	}
}

Main.cs

void Main()
{
	//setup some test data
	var list = new List<Folder>();
	list.Add(new Folder{ Id = 1, Name = "A 1", ParentId = null });
	list.Add(new Folder{ Id = 2, Name = "B 1", ParentId = 1 });
	list.Add(new Folder{ Id = 3, Name = "B 2", ParentId = 1 });
	list.Add(new Folder{ Id = 4, Name = "C 1", ParentId = 2 });
	list.Add(new Folder{ Id = 5, Name = "C 2", ParentId = 2 });
	list.Add(new Folder{ Id = 6, Name = "D 1", ParentId = 3 });
	list.Add(new Folder{ Id = 7, Name = "D 2", ParentId = 3 });
	list.Add(new Folder{ Id = 8, Name = "E 1", ParentId = null });
	list.Add(new Folder{ Id = 9, Name = "F 1", ParentId = 8 });
	list.Add(new Folder{ Id = 10, Name = "G 1", ParentId = 9 });
	list.Add(new Folder{ Id = 11, Name = "H 1", ParentId = 10 });
	list.NestList().Dump();
}