Driving with OD reduces the TC slippage but doesn�t prevent it. The TC in the CD4E is designed to lock in 3rd and 4th(OD). During the lock, the fluid in the TC circulates backwards. This is not a problem because the fluid is no longer transmitting torque and so doesn�t get hot. In your case, the TC is using the fluid to transmit engine torque when the TC is supposed to be locked, so it is heating up. Add to this the heat generated by the slipping clutch material and the fact that the fluid is trapped inside the TC and you got problems.
Or the short answer, driving is 3rd reduces the load on the TC friction material thus reducing slippage and heat.
Your best option is a full rebuild with new TC. I would question the rebuild shop on there knowledge of CD4E upgrades (sonax valves and such). No point in putting the same problems back in.
jeff
