If after seeing that message you closed Photoshop and then restarted Photoshop which I think you may have done for Windows does not run well when your C: disk becomes full. If You terminated Photoshop because you got the message and Windows was not running well. The scratch space the Photoshop had allocated would have been returned to C: disk free space. Also 856MB is not much free space I have seen Photoshop use much more free space than that on my system. Many GB in facts. Photoshop also create temp work files in your user id temp space which is also one you C: disk. I feel you need to free up space if C: is the only disk you have.
I just closed PS
Free space is up to 129GB
you should consider a 1t external drive to use as a time machine/backup and add it to that dialog you have open for Photoshop to go in there first before going to your C: drive for scratch disk space.