I spent hours trying to figure out what happened to start causing this error on Windows Server 2012R2. Google results are slim, but some referenced an invalid password (wtf?). I reset SoftwareDistribution, changed OUs (for Group Policy), removed and re-added to the domain, nothing.
In the end, I checked the TEMP and TMP Windows system variables – they were pointing to an invalid folder location. I created that folder and immediately tried to install updates again – 100% success! THANK GOD!
On a side note, why can’t Windows just say INVALID FOLDER?! 🙂