You should use some punctuation here and there. This is how I imagine what you are describing -

function onNodeModifying(diagram, args)
{
	var container = args.node.container;
	if (container)
	{
		var rect = args.node.getBounds();

		// prevent dragged node from intersecting with other nodes in same container
		for (var sibling of container.children)
		{
			if (args.node == sibling)
				continue;
			var siblingRect = sibling.getBounds();
			if (rect.intersectsWith(siblingRect))
			{
				args.setCancel(true);
				return;
			}
		}

		// calculate new container bounds if node dropped here
		var crect = container.getContentBounds(true);
		crect = crect.inflate(container.margin);
		crect.y -= container.captionHeight;
		crect.height += container.captionHeight;
		if (!container.allowShrink)
			crect = crect.union(container.bounds);

		// prevent container from intersecting with other nodes in parent container
		// this should be done recursively instead
		if (container.container)
		{
			for (var sibling of container.container.children)
			{
				if (container == sibling)
					continue;
				var siblingRect = sibling.getBounds();
				if (crect.intersectsWith(siblingRect))
				{
					args.setCancel(true);
					return;
				}
			}
		}
	}
} 

This does not handle the case of moving child node entirely outside of its current container. In this case crect would just follow the dragged node, even if container would not expand if you drop the child outside. If you need to prevent moving child outside of container, you could add an extra intersection check -

function onNodeModifying(diagram, args)
{
	var container = args.node.container;
	if (container)
	{
		var rect = args.node.getBounds();

		// prevent dragged node from intersecting with other nodes in same container
		for (var sibling of container.children)
		{
			if (args.node == sibling)
				continue;
			var siblingRect = sibling.getBounds();
			if (rect.intersectsWith(siblingRect))
			{
				args.setCancel(true);
				return;
			}
		}

		// do we allow child moving outside container?
		if (!rect.intersectsWith(container.bounds))
		{
			args.setCancel(true);
			return;
		}

		// calculate new container bounds if node dropped here
		var crect = container.getContentBounds(true);
		crect = crect.inflate(container.margin);
		crect.y -= container.captionHeight;
		crect.height += container.captionHeight;
		if (!container.allowShrink)
			crect = crect.union(container.bounds);

		// prevent container from intersecting with other nodes in parent container
		// this should be done recursively instead
		if (container.container)
		{
			for (var sibling of container.container.children)
			{
				if (container == sibling)
					continue;
				var siblingRect = sibling.getBounds();
				if (crect.intersectsWith(siblingRect))
				{
					args.setCancel(true);
					return;
				}
			}
		}
	}
} 

If you do allow moving child outside of its container, then you will also need to check for intersections with its new siblings in container.container. There's also the possible case of moving the node to a container in a different level of the hierarchy - not just current container's parent, so you will need to code all that recursively.