Aha... you ran into a bug in which WebDAV was not properly escaping certain special characters (such as ampersands) when they're present in file/directory names.
A hotfix is available to address problem; see KB 957001 for details. This applies to "WebDAV 7.0 for IIS 7.0".
Another option is to upgrade to WebDAV 7.5 for IIS 7.0. This upgrade includes the above fix, as well as WebDAV lock functionality.
You can find information on Failed Request Tracing here. FREB is useful for tracking down many server errors, but unfortunately it would not have helped in this situation.