Since the truck drives fine...I'm going to leave the t-case alone for the time being. I don't have the knowledge, time, or work area to tear this transfer case down so I doubt we'll ever know the full cause of this. I may look into replacing the case early 2024 and will update this thread with the cause if it something I can figure out.

 

Finally got to the bottom of this in case anyone else is interested. My 6L80-E transmission went out (appears to have been replaced or rebuilt before) so I had a well known shop in my area replace it with a GM re-man unit. I asked them about the transfer case and they said that the trans case is operating as normal and it’s just an odd system in the H2. This isn’t the first one that they’ve seen like this. The case isn’t that odd, but the way it’s set up seems weird to those of use used to typical 4WD systems. Hopefully this brings a close to anyone looking at this in the future.