When you go to create a new category inside of the Parent Category dropdown it is including the Sub Categories. Sub Categories shouldn’t be in this list because you can’t have a Sub Category be a Parent Category. Good news is if you do select a Sub Category and press the “New Category” button it does show a red warning at the top that this can’t be done.
I’m in the middle of working on a fix for this bug and will hopefully be able to finish it up later tonight/tomorrow.
The parentCategories filter on the Categories Model appears to be working as intended, but I think the issue has to do with the fact that the parentCategories aren’t actually being passed into the category-chooser module but instead being picked up by the observer which doesn’t have the filter.