the fact that I couldn't walk out of the store with the phone in the same configuration I walked in with is what bothers me.

Verizon has configured the system to block these phones from use on postpaid. You got away with something you shouldn't have been able to get away with.

There was no way they (or anyone further up the escalation chain) could remove the flag in the DMD?

I edited my post, yes there is a way but you aren't going to find anyone who will do it because you didn't pay the required amount to prepaid.

This is a subsidized device.

Or, the rep couldn't check it before assigning a new sim card, and saying "Look, I could do this, but it would lock the phone to prepaid, so do you really want to do this?"

The rep wouldn't have any way to know that. You should have told them your device was "special" if you wanted advice. You know you weren't entitled to use that device on postpaid so you said nothing. Well this is the result.