We do not currently use the sorted version of this input in the
function, which means we produce bad results.

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.