There are two approaches to Tcase lubrication. One is splash. A small mount of oil in the bottom of the case is splashed over the necessary parts. Gravity drains it back to the bottom.
The second approach uses a pump which draws from the low part of the case, and delivers the oil to the bearings, gears and chains are lubricated by the oil slung/splashed from the rotating parts.
When there is to much oil, it foams and fills the case (to much contact with spinning parts). Imagine trying to mix a pot of food, the more liquid in the pot, the harder it is to mix. This increase in effort (drag) means the liquid is stealing power/energy as fluid drag. Now imagine that you have gears spinning at hundreds of RPM, that power adds up quickly, and the Tcase will rapidly warm up.
Generally most of the rotating parts are not submerged. So they are moving through air with a bit of oil mist/droplets.