htaccess errors in non related members area

I am having an issue with permalinks and htaccess. I have wordpress installed in wp directory with the blog setup in main root /public_html/index.php. When I set permalinks to use seo friendly structure it causes a redirect error in the members area. We cannot login to domain.com/members/index.html as it sends to domain.com/index.php (blog error page)

Any clue why htacess permalinks would interfere with htacess for members are in a directory below?

directory structure is like the following

domain.com/index.php << blog
domain.com/wp/ << blog files
domain.com/members/ << members area