I'm seeing this error as well when using the Android app.
Do you see the error across the board or only when entering certain folders?
I've determined that my issue is due to characters in file names that the application can't handle.
Example:
I have a folder named "DJ Tiësto" Subsonic doesn't like the 'ë' and is using the coverall unicode replacement character � instead. In the web source code, this is shown as "\uFFFD" and the web application seems to be able to read this folder and play files with no problem. The Android app however can't handle these characters at all.
Another example:
Suzanne Vega - 99.9 Fº
The web app replaces the degree character with � but Android can't read it.
Apparently, any character found in the extended table of the standard ascii chart are replaced and they're not parsing to Android correctly.
Info about the unicode replacement character:
http://en.wikipedia.org/wiki/Specials_(Unicode_block)
If you're seeing this error immediately upon connecting to your local server, I'd check to see if you have any files with extended characters in your root music folder. If so, this would prevent Subsonic from loading anything at all.