Ok, something just occurred to me within 5 seconds of posting that question which may help out. I believe that this is a bug in the PhotoPost code.
1. If the NEW
parent category is set to "Contains Thumbnails? = No" and the category you are moving beneath it is set to "YES" then the error is generated and the category is bumped up as a new top-level category.
2. If you temporarily set the NEW
parent category to "Contains Thumbnails? = Yes" you can move the child category beneath it w/o an error being generated. Then you can go back to the new parent category and set "Contains Thumbnails? = No".
It seems that there ought to be some logic in the PHP code that lets a child category containing thumbnails to be moved beneath a parent category tha does NOT contain thumbnails. Many of us have our galleries set up like this with empty parent categories for the sole sake of having a hiearchy that looks more like our forums hiearchy.
If that makes sense.