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I remember reading somewhere that you're supposed to have the transfer case in a particular mode (I thought 2WD) before removing to make sure that the new encoder motor would be lined up properly. However, it seems to me that even if the encoder motor wasn't engaging properly that you should be able to move in 2wd, but I'm not an expert in transfer cases.
I know my transfer case started making grinding noises even in park right before it completely self-destructed. So it could be that it's more than just an encoder motor issue. I hope for your sake that it's not.
 
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