I know this is a bit after the fact but we had this issue on a couple of systems after upgrading to R11 so we opened a case with Avaya support.
The outcome of this was that the trigger for the phones going into the password error state was a network drop out. Once the network is restored the new R11 software dose not seem to like 16xx phones re-registering when they have SRTP enabled.
The Avaya solution was to disable SRTP for any extension with a 16xx handset in <extensions/VOIP/media security> as the 16xx range of handsets do not support it
You will still need to address the network issues however, as this is what initially triggers the problem.
“Some humans would do anything to see if it was possible to do it.
If you put a large switch in some cave somewhere, with a sign on it saying 'End-of-the-World Switch. PLEASE DO NOT TOUCH'.
The paint wouldn't even have time to dry.”
Terry Pratchet