Thought I'd share some useful information.
Apparently there is a somewhat common issue with the borg warner 1356 transfer cases. I found out the hard way that the oil pumps are prone to failure. When they fail the pump seizes to the main shaft. This causes the pump housing to spin typically resulting in all sorts of carnage within the case!

In my case when the pump seized it spun a chunk of steel between the main gear which engaged 4 wheel drive permanently. This was causing an annoying ticking sound which sounded a lot like failing brake shoe hardware.