I just ran into this again. If you have active listings in the root category you want to edit or add subcategories to and the application asks you to move them to "other items" to proceed, and you do that. You can then create your 2nd level categories but gives you this error on an attempt to create a third level below one of these newly created ones (this is the issue I had). My solution was to move all the listings out of "other items" before I could proceed below the newly created 2nd level.
I put the "other items" in one of the 2nd level categories just created and I was able to create the 3rd level and now will have to move them down to the 3rd level. Frustrating since error message is useless. Your solution put me on this, thanks! even though I believe they are totally different features.
Unfortunate you try to plan and build your categories (template) out before populating, but occasionally you don't anticipate how you products will expand under a given category you previously created.
Hindsight could be easier to build new category template with similar naming convention, move listings, then delete old one. May even be able to go back and rename the new root level.
Last observation I don't have a category other items show up in the store I may have deleted or it may be a system item. Moving existing items into a temporary user category and preventing the system from using "other items" may also help.
Sorry for the length and ramble but when you spend part of a couple days pursuing abstract features might as well share :-).
