Can someone settle this argument!!!

Scenario

Preflop blinds 500/1000

Player one all ins 400 chips
Player two (500SB) calls 500 to match blind
Player Three (1000BB) Checks

This creates two pots one with 1200 for all players and one with 1200 for players 2 and 33.

After flop

Player two Raises ALL IN
Player Three Folds

My understanding is that 1200 goes to player 2 and the other 1200 is between players 1 and 2 as player 3 has been bet out of the hand.

My friends argument is that player 3 is entitled to pot 1(1200) as her has put 400 into this!!

Can anyone settle this dispute!!