Forum Moderators: mack
i think you may be confusing the meaning of "public domain" - i believe it means (in short) something on which the copyright has expired or there was no copyright for.
i'm not a lawyer but if you haven't used an image what can you be sued for, you haven't breached any copyright.
also if the image is not viewable on your website i don't think it possible to "find" it on a folder on your server without doing something very illegal
Now the owners of the image say they've tracked it in my server
It certainly sounds as though there was a link to that image (in it's location on your server) somewhere. Maybe on your site, maybe on someone else's site. Does anyone else have access to your image folder?
Others will know better, but I can't imagine how anyone could track down an image to your server if it wasn't linked to from somewhere.
You need to find out if indeed the image was available somewhere. You also need to talk to an attorney who specializes in copyright - ideally one with internet experience.