Originally Posted by Diesel911

What you described can be your B2 piston on the way out. Mine did that and changing the filter and fluid fixed it but less then a year later my B2 Piston broke. When it breaks you cannot go forward.

There is the piston itself a lip seal and if it is the original there is an aluminum bushing. So you have a 30+ year old lip seal and a aluminum bushing that kind of grabs onto the B2 piston. The replacement bushing is made of nylon.

On a W123 the B2 piston area is up in the tunnel so it is slightly more complicated then on some of models from the same year.
The new piston has also been updated. I don't know if the 1985 has the updated piston already or not. I would ask member Deliveryvalve about that and also about your actual transmission issue.

In the attached picture of my broken piston the red arrow points to where the Piston was binding on that aluminum bushing.

And oddly the lip on the lip seal faces outwards.