hmm... I think something has changed with the way MO/xEdit is handling these files. I just verified my files with Steam, to restore them to 'dirty' and then using MO 1.3.5 and xEdit 3.1.0 I cleaned the 'Update.esm' and my cleaned file and a TES5Edit Backups folder with datestamped original Update.esm are both in my 'Overwrite' folder and nothing in my Data folder.
Retried it with Dawnguard and exactly the same result. This is going to be tricky to figure out if different versions are placing the files in different locations.