Tranny temp sensor causing Failsafe in 5HP-24?

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Here's a bit of a mind-boggler:

A couple days ago, I was driving along for about 20-30 min and decided to downshift to pass a slow moving car. The revs kicked up and then a thud, and "trans. failsafe prog" came up.
It got stuck in 4th and I limped home.

Let it sit for 45 min and took it back out. Shifts perfectly. After a few minutes, it starts slipping, and then kicks back into to trans failsafe.

So I let it sit for 6 hours, did a quick drain & fill (4 quarts), and took it out for a drive. I got about 10 min of problem-free driving until it started slipping and mis-shifting again. Then goes back into trans failsafe.

So it seems that when it's cold, it's perfect. As soon as it warms up, it will not drive correctly.
When warmed up, it will not move when shifting from P to D (no issues at all when cold). Rev it up and then thud, trans failsafe.
Reverse works fine when cold or hot.

Checked tranny fluid temp with INPA while driving. 120-130C. Seems very high.
But here's the kicker: I let it sit overnight (16 hours to be exact) in a cold 35 degree F garage.
Checked temps in the morning (via INPA):
Engine is 6 degrees C but tranny fluctuates between 20-21 degrees C. Doesn't seem right.

So, bad temp sensor?? Can it cause the improper shifting/slipping?

I'm really hoping I don't need a rebuild.