Anytime a batter contacts her own batted ball over foul territory, it is a foul ball.
The explanation the umpire gave does have a small kernel of truth to it, or at least some plausible reason why the whole "it had a chance to become fair" argument was in his mind in the first place.
There is a baseball rule that states a batter can be called out for intentionally contacting a batted ball over foul ground if the umpire judges that the batted ball still had some reasonable chance of becoming fair.
Picture a slow roller up the first base line, in foul ground but not yet fair or foul, with the catcher about to pounce on it. A batter can't intentionally contact that ball to stop it from going fair and prevent the defense from making a put out. That would be interference.
For whatever reason, this is one rule that never made it into the softball rule books (at least, not for ASA or high school -it wouldn't surprise me if some softball sanctioning body has a similar version of this rule).
In any event, even if this was a baseball game, the umpire would have to rule the batter's contact as intentional to call the out. And, since it wasn't a baseball game, it's just a plain old fashioned foul ball anyway!