OS X 10.6 server Time Machine error

TM stopped working about 10 days ago.
run disk utility to repair permissions and check drive for errors.

restarted system few times. installed new USB drive instead of old one. same issue.
this is on 2009 mac mini server.

the backup starts - but when it reaches about 12GB, it fails with the error message. pics.

the second drive is clean, new partition with no data.

tried to copy files manually and came across this:

The operation can’t be completed because an unexpected error occurred (error code -41)

it's one folder with about 3000 word documents. i can copy all from within the folder fine, but if try the folder itself, then i get the error.