Always install the convertor in the auto prior to mating it with the engine. The convertor should be able to slide back and forth once the engine and box have been mated, when the convertor bolts aren't done up.
When installing a convertor it should drop down twice. If it doesn't and you try and mate it with the engine. You'll break the front pump in the auto.
As much as it sounds to be a pain it's better to do box and engine all in one hit. Much easier!
Whats the oil look like? Full of metal or clutch material?
I am on a steep learning curve with C4. I'm on my 5th in 3 years.