I hit post too quickly. Wanted to add:
We went in and deleted both groups and start over. On the second attempt, after creating both groups and then trying to create the dependency, we noticed both groups had no members (after adding them when we created the groups). So we started over a third time.
On the third attempt after creating the groups and getting ready to create the depended, we noticed that the one group was a member of the other group. So we deleted the one group from the other group and then deleted the last group. We then started over a fourth time.
On the fourth attempt everything worked as planned. We had 2 groups with 2 members in each group and group A was a parent of Group B.
Correct me if I am wrong but it sounds like you were creating new groups each time when creating the dependencies. Were you calling the new Groups the same name each time you recreated them? We have some caching built into the website for dependencies and I wonder if this was taking part in the trouble you were having.
Were you also deleting the incorrect dependencies each time around?
Karlo - What you describe is what we were doing. Deleting and recreating the group with the same name. The time it worked we used different names. We did not delete the dependency the first few times, but did delete them on the last attempt - along with the name change on the group.
So my guess is that the caching was playing a role.
rhoracek - I can't say for sure, but I am pretty confident we did not create nested groups by creating the second group inside the first group.
In the Group Management, when you click on any group, that group is selected and then it is used as a parent for the following newly created group. Then the described error in dependency definition would occur.
Probably this is what happened during the first and the third attempt