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Thank you for the information and your question. The reference is just referring to the regulatory basis for your separation. It doesn't change your characterization, which is an OTH. You couldn't have both an OTH and a DD. It is one or the other and the latter can only occurred at a General Court-Martial. In other words, it is a punitive discharge controlled by the UCMJ and not an administrative discharge like what you received.
That particular Chapter has to do with separation in lieu of court-martial. You can see that regulation by going to the following link: http://www.apd.army.mil/pdffiles/r635_200.pdf
What you were told is actually an urban legend. A discharge is never upgraded automatically, but instead there is a petition process which normally must occur within 15 years of the discharge and the Board will only upgrade if the discharge was issued in error or was an injustice. Very few petitions are approved.
Please let me know if you need any clarification.
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