GM-GMC: 700R4 transmission and transfer case, chevy 1500, salvage yard


Question
I have an 89 Chevy 1500 p/u and the transfer case rear seal started leaking. This caused my transmission to lose third gear.  After rebuilding the transmission, replacing the seal, and flusing the transfer case, I noticed that when i shift into 4-Low the transfer case gears grind and not allow me to go into 4-Low, but it does allow me to go into 4-HI with ease(it is in neutral when i shift it).  

I was wondering does the transmission fluid flow between the transmission and the transfer case? And what could be causing this?  Also, could the transfer case be making my rearend clunk worse than before the transmission was built or is that in the rearend itself?  

Answer
I cannot be certain about your 1989 vehicle since GM went to IFS with the body style change in 1988.

In my 1984 K-2500, there is no fluid transfer between the thransfer case and transmission.  They have separate drain and fill arrangements and draining one does not affect the other.  They both use Dexron but that is all they have in common.

I suspect that your transfer case was damaged when the oil seal failed and the fluid level got low.  On the IFS vehicles, all the front wheel drive components turn becuse there are no manual or automatic hubs on them.  4WD is accomplished by controlling whther the front differential is locked or free and by shifting the transfer case from 2WD to 4H or 4L.

I would remove the transfer case and disassemble it, checking all the parts in accordance with the shop manual or equivalent.  Or find one at a salvage yard and replace the one in your vehicle.