Hi Sam,
Thanks for your sharing and the detailed screenshots. It shows clearly that the same Class Materials showing as shortcut issue can be reproduced when a new test class is created. In this situation, it is highly possible that this issue could be a temporary server-side issue or some related setting cache in the tenant side, which both needs to be investigated through the remote section and collect error logs from back-end to fix this for you and your colleagues.
Please ask the admin to raise a free support ticket from the Microsoft 365 admin center and report the issue to the online escalated support team to get the proper and dedicated support. The support team there has more permission than us, they can help you remotely and collect logs to find out what exactly happened that caused the folder shortcut conflict. They may also involve more resources to investigate the issue from the backend. This would be the most efficient way to handle this case for you and your tenant. Reference: Get support - Microsoft 365 admin | Microsoft Learn

Please accept my apologies and regret that I did not resolve the issue and redirected you to the related development team, but the solution to your concern can be found through the HAR logs and suggest that you raise a support ticket from the Office 365 admin center, where the related team will investigate the issue further by collecting the HAR logs.
We are redirecting it to the right support channel to solve the problem. That's why we suggest you contact your administrator or your IT department. They can create a support ticket. Once your administrator or IT contacts them, they will help you in 30mins.
I am sorry and apologize for it.
Your understanding and patience will be greatly appreciated. I hope you stay safe and healthy!
Sincerely,
Mia | Microsoft Community Moderator