Can you identify the noise made by the transfer case encoder motor separately from the front axle actuator? A sluggish actuator might be the issue. And when you go into 4LO are you also putting it in neutral, since there's an interlock.
Also did you change the transfer case fluid at 50 and 100K religiously?
Here's a couple of TSBs that are relevant:
Document ID# 2042285
2004 GMC Truck Envoy - 4WD
Subject: ABS Red Brake SVC And 4WD Light On HVAC Blower Inoperative - keywords B1375 C0379 DTC HI4 ignition IPC L04 MIL on U1000 U1041 #PIT3832C - (12/04/2007)
Models: 2004-2007 Buick Rainier
2002-2008 Chevrolet Trailblazer models
2002-2008 GMC Envoy models
2002-2004 Oldsmobile Bravada
The following diagnosis might be helpful if the vehicle exhibits the symptom(s) described in this PI.
Condition/Concern:
Vehicle may exhibit a combination or all of the following symptoms: ABS light on, Red BRAKE light on, Service 4WD light on, HVAC blower motor inoperative. Various DTCs may also be present.
Recommendation/Instructions:
Diagnose for loss of battery voltage to the rear fuse block on circuit 300 ORN for the following fuses:
Note: Prior to proceeding forward with the information below, it is important to verify the voltage as indicated however it is equally important to verify the integrity of each circuit. This can be achieved by performing a voltage drop test or by adding a device to each circuit that will supply sufficient load to verify the circuits integrity.
HVAC 30A, 4WD 15A, HVAC 1 10A, BRAKE 10A, TBC RUN 3A.
Check circuit 300 ORN for battery voltage when the ignition key is in the RUN position.
Check for battery voltage at the rear fuse block under the rear seat Connector C1 pin D9.
If battery voltage IS NOT present at these locations, check for voltage at the ignition switch pin G for circuit 300 ORN.
If battery voltage IS present at the ignition switch pin G, check circuit 300 for an open.
If battery voltage IS NOT present at the ignition switch pin G, replace the ignition switch.
Note: This PI does not apply to the Saab 97x. The 97x has a unique ignition switch location and an electrical harness. With this new switch, the electrical center pin designations and the ignition switch connector is different. In the event the concern above is experienced in a Saab 97x, circuit 300 can be checked for integrity using the appropriate schematics in eSI.
Please follow this diagnostic or repair process thoroughly and complete each step. If the condition exhibited is resolved without completing every step, the remaining steps do not need to be performed.
Document ID# 1463044
2004 GMC Truck Envoy - 4WD
Subject: Diagnostic Trouble Code (DTC) C0379 Set, Service 4WD Light On, 4WD Inoperative (Replace Front Axle Actuator) #04-04-19-001 - (02/23/2004)
Models: 2004 Chevrolet TrailBlazer, TrailBlazer EXT
2004 GMC Envoy, Envoy XL, Envoy XUV
with Autotrac Active Transfer Case (RPO NP8)
Condition
Some customers may comment that the Service 4WD light is on and/or the 4WD system will not engage. This condition may only occur after a cold temperature start-up (typically below -6°C to -1°C (20°F to 30°F).
Cause
If this concern is accompanied by an illuminated "Service 4WD" light, and a DTC C0379, during a cold weather start up, the following information may apply.
The front drive axle actuator assembly engages the front axle in response to commands from the Transfer Case Control Module (TCCM). Normally, the cycle time for engagement is under 3 seconds, regardless of temperature. If the actuator does not engage the front axle assembly within 10 seconds, the TCCM sets DTC C0379, illuminates the "Service 4WD" light and disables the 4WD system. There have been reports of vehicles with front drive axle actuator assemblies that take longer than 10 seconds to engage, setting this code.
Correction
Important: When a vehicle with this concern is diagnosed in the repair facility, usually the inside temperature is warm enough that the system operates normally, and the C0379 will be set as a history code, making the concern intermittent and difficult to diagnose.
If following the diagnostic chart for C0379 does not reveal another cause for the code, and the temperature was below approximately -1°C (30°F) when the customer noticed the condition, replace the front drive axle actuator assembly with P/N 12471631.
Follow the service procedure below to replace the front axle actuator.
Raise the vehicle. Refer to Lifting and Jacking the Vehicle in General Information. Refer to Lifting and Jacking the Vehicle (SI Document ID #744862).
Remove the engine shield mounting bolts.
Remove the engine shield.
Disconnect the electrical connector from the actuator assembly.
Remove the actuator assembly bolts.
Remove the actuator assembly.
Install the new actuator assembly, P/N 12471631.
Notice: Use the correct fastener in the correct location. Replacement fasteners must be the correct part number for that application. Fasteners requiring replacement or fasteners requiring the use of thread locking compound or sealant are identified in the service procedure. Do not use paints, lubricants, or corrosion inhibitors on fasteners or fastener joint surfaces unless specified. These coatings affect fastener torque and joint clamping force and may damage the fastener. Use the correct tightening sequence and specifications when installing fasteners in order to avoid damage to parts and systems.
Install the actuator assembly bolts.
Tighten
Tighten the bolts to 6 N·m (53 lb in).
Connect the electrical connector to the actuator assembly.
Install the engine shield.
Install the engine shield mounting bolts.
Tighten
Tighten the engine shield mounting bolts to 25 N·m (18 lb ft).
Lower the vehicle and test.
Parts Information
DO NOT order parts for stock. Parts are in LIMITED quantities at GMSPO.
Part Number
Description
Qty
12471631
Actuator, Front Drive Axle
1
Parts are currently available from GMSPO.