The loop is made with the assumption that the inputs are sorted and not
using it leads to bad outputs.

We look at whether we're trying to replace a blob with a tree during the
update phase, but we fail to look at whether we've just inserted a blob
where we're now trying to insert a tree.

Update the check to look at both places. The test for this was
previously succeeding due to the bu where we did not look at the sorted
output.