I didn’t really know what to put for the title of this post, but hopefully the content makes more sense and gets indexed properly and found by people looking for this specific information.
The problem is when you install WordPress and setup Permalinks which uses a .htaccess file for Apache. The .htaccess make cause problems with other applications or HTML files you have in sub-directories in your document root.
The fix? It’s simple, just view this blog post. It explains to fix the problem you simply place “ErrorDocument 401 default” at the top of your .htaccess file and everything is resolved. Your WordPress installation still generates 404 pages, but now sub-directories work correctly.