Nginx reverse proxy gives 404 with static content requests

Our setup is two servers:

• One serves WP installation
• The other one is used for extra custom functionality.

Server 1 that hosts WP is using Nginx as web server and reverse proxy to Server 2.

In Server 1 we have a simple location block for reverse proxy:

location /foo/ {
   proxy_pass        http://1.1.1.2/foo/;
   proxy_set_header  X-Real-IP  $remote_addr;
   proxy_set_header  Host       $host;
   proxy_redirect off;
   proxy_intercept_errors on;
}

In Server 2 we also have a location block because the platform requires a bit URL rewriting. It's a bit mixed bag because the platform loads some content via index.php?args but there's also static content:

location /foo/ {
   index index.php;
   try_files $uri $uri/ /foo/index.php?$args;
}

The problem we are facing is that while domain.com/foo/?bar, domain.com/foo/bar works great, domain.com/foo/img/photo.png gives 404.

I assume this is due try_files but I can't seem to get it working.