Ok. I figured this one out. For those who might encounter this issue again, here's how I managed to identify and fix it:
Eclipse's cvs client sucks - it doesn't give you much information. (I could be wrong, may be it writes some debug info to eclipse log file - still, I think that error message should have been more descriptive). Anyway, I obtained TortoiseCVS and attempted a checkout and it failed with an error message on the lines of -"failed to obtain dir lock in repository `/home/cvsroot/foo'. This is not the exact message, but it was something like that.
So, all I had to do, was go into my cvs dump from cvsserv1, look for references to that directory (which is a valid path on cvsserv1 but not cvsserv2). I found a reference to it in config file under CVSROOT folder. It was assigned to a property called LockDir. This property was referring to a /home/cvsroot/foo on the older server as a lock directory. All I had to do was comment out this property and restart cvsd. Everything started working just fine after this!