The fluid does not smell "bad" or any different really than does new fluid. Also a fine light dusty coating of black powder covering the bottom of pan, filter and is "adhered" to just about everything else.

Friction material? Sound bad? Supposedly it ran fine.

All the fine metal shavings settle to the bottom of the pan. So fine they have the appearance and consistency of fine powder or dust. If the fluid didn't smell like varnish I would clean the pan, change the fluid and put the trans in. Good luck!